Module I·Article I·~2 min read
Principles of Taxation and Tax Systems
Fundamentals of Taxation
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What is a Tax
A tax is a mandatory, individually non-reimbursable payment levied by the state on organizations and individuals in the form of the alienation of monetary funds for the purpose of financially supporting governmental functions.
Key features: obligatoriness (not a voluntary contribution); non-reimbursability (not payment for a specific service); monetary form; legally established.
Principles of Fair Taxation
Adam Smith (1776) formulated four principles:
Equality — taxes should be proportional to the taxpayer’s income (“each according to ability”).
Certainty — the taxpayer must know in advance the amount, time, and method of payment.
Convenience — the tax must be collected at the time and in the way that are most convenient for the payer.
Economy — the costs of collecting taxes must be minimal in relation to the receipts.
Modern principles add: neutrality (the tax should not distort economic decisions); sufficiency (provides government financing); transparency.
Progressive, Proportional, and Regressive Taxation
Proportional (flat tax): the same rate for everyone. Russia: Personal income tax 13% (15% above 5 million rubles). Easier to administer but criticized for unfairness (the rich pay a smaller share of expenditures).
Progressive: the rate increases with income. USA: from 10% to 37%. Germany: from 14% to 45%. Argument: diminishing marginal utility of money — $1000 is less significant for the rich.
Regressive: as income grows, the effective rate falls. VAT is de facto regressive: the poor spend a larger share of income on consumption.
Tax Systems of the World
Residence-based system (most countries): taxation by place of residence — residents pay taxes on worldwide income.
Territorial system (UAE, Singapore, Hong Kong): taxation only on income from local sources. Foreign income is exempt.
Citizenship-based system (USA): the USA is the only major country that taxes citizens regardless of their place of residence. An American residing in the UAE still pays in the USA.
Practical Assignment
A Russian entrepreneur (tax resident of the Russian Federation) receives: (1) salary in Russia, (2) dividends from an offshore company in the BVI, (3) rental income from real estate in the UAE, (4) interest income from a bank account in Germany. Determine which incomes are subject to Russian personal income tax, and at what rates.
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