Discuss the key problems

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Discuss the key problems with financing the statutory social services through the various forms of taxation. In this essay primarily I will discuss the various forms of taxation used by the government today, secondly I will conclude with the main problems the government face in relation to financing the statutory social services. Presently the largest source of income for financing the social services is from three sources, the first is from taxes (including rates) which accounts for 70%, secondly from social insurance or national insurance contributions which is 20% and thirdly from fees and charges making up 10%.

There are quite a few differing forms of tax; the first I will discuss is direct and indirect taxation. Direct taxation is effectively taxes on income or wealth of households, local or central government can charge these and indirect taxes are taxes on use of income (Le Grand, Proper and Robinson p. 207) Indirect taxation tends to be regressive; for example the percentage of income paid in indirect taxes falls as income rises. Regressive taxation takes a higher proportion of the income with those on a lower income than those with a higher income.

When the poll tax was introduced everyone living in a particular area was charged the same amount despite some being unable to pay. However individual taxes have diverse effects such as tax on tobacco is more regressive than the tax on motoring. The third difference is between progressive, regressive and proportional taxes; income tax is an example of progressive tax because people on higher earnings pay a higher tax rate as opposed to people on a lower wage.

The basic rate of income tax was cut between 1979 and 1997 from 33% to 23% and the higher rate dropped from 80% to 40% meanwhile a lower band was introduced at 20 % on the first i?? 2000 of taxable income, rising to i?? 4,100 in 1997. (Haralombos & Holborne 2002) Recently statistics show that households in the UK currently approximately 35% of income are tax deductible in the poorest and richest households; this consequently effects the poor more than the rich.

If Income tax is increased this may effect an individuals desire to work. To increase taxes, it has been argued, may cause a disincentive to work and may deter individuals from working harder in two ways. (Le Grand, Propper & Robinson). Firstly it will decrease the wage an employee receives from working an extra hour and secondly an employee may be inclined to decrease the amount of hours worked, and substitute these hours in leisure activities as opposed to hours in paid employment.

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