Taxation Law in the UK Essay Example | Topics and Well Written Essays - 750 words

Taxation Law in the UK - Essay Example VAT system is a type of indirect tax. According to the canons of taxation, an indirect tax must not be levied on basic necessities. Adam Smith made a distinction between goods that are necessities and the goods that are luxuries. He advocated the levying of taxes on luxuries. Necessities are mostly exempt under the VAT system in modern times. Adam Smith might have applauded this aspect of the VAT. His argument in favor of low indirect tax was just not related to the welfare of the poor; it was also due to the fact that the rich can also suffer from high indirect taxes as they become less productive as a result. VAT system’s definition of ‘necessaries’, however, seems to be a tad different from that of Adam Smith’s. According to Smith, â€Å"†¦necessaries†¦[include] not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived†¦ very comfortable, though they had no linen. But in present times†¦a creditable day-laborer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which it is presumed, nobody can well fall into without extreme bad conduct.† According to the canon of equality, the tax should be linked to an individual’s ability to pay. VAT is generally similar for all the individuals. As the marginal utility of money is more for the poor than for the rich, poor suffer more. This means that VAT is regressive in nature. This is why it can have a significant impact on the distribution of income.