Principles, Methods and Procedures for Adjusting Income Tax

Income tax plays a very important role in ensuring budget revenue for the State and performing the State's macro-management and regulation functions for economic and social activities in the entire national economy. Income tax appeared very early in the history of taxation. High or low tax rates levied on total income or on different incomes of subjects often depend on the income regulation perspective and the goals set in income distribution of each country in certain periods. Therefore, there may be types of income that are not subject to tax or are only taxed in certain periods with different tax rates.

Adjusting income tax is inevitable in many cases, so many governments consider it the most effective tool with a strong impact on the whole society. Adjusting income tax has a quick and strong impact on social subjects, so governments are always cautious about their tax policies.

Adjusting income tax is to amend and supplement income tax in both income tax policy and income tax management to achieve income tax management goals. In the framework of this thesis, we will focus on studying the adjustment of income tax policy. Thus, adjusting income tax policy will include adjusting corporate income tax policy and adjusting personal income tax policy.

1.1.1.2. Characteristics of income tax

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- Income tax is a direct tax so it often receives strong reactions but is quite fair and effective. Depending on the tax system, whether it is a comprehensive or a flat tax, there will be different reactions. This characteristic is also linked to the awareness of taxpayers and the economic structure of the economy. A developed economy often has higher tax rates and vice versa. Meanwhile, taxpayers, although having to pay high taxes, still have a comfortable income, so the tax burden is considered lighter. Thus, the awareness of tax compliance of this group is also higher.

- Income tax rates are usually high and progressive because income tax acts as a direct tax to ensure social equity. However, high-rate income tax systems often apply a standard tax system to ensure

Income tax is not levied twice. On the contrary, incomes below the median level are often given larger exemptions.

- The income tax system is often associated with income distribution and redistribution programs, so it has a great influence. Especially income tax for individuals subject to tax according to the principle that high income must pay more and vice versa. Income tax does not have a direct redistribution effect by equalizing the income of all members of society, but it has the effect of reducing the gap between rich and poor in society.

- Income tax is characterized by being based on the source of income or place of residence, so it is often associated with direct management and reporting. Managers and supervisors also need to master many professional skills and appropriate behaviors. Income tax is associated with the source of income and place of residence, making it necessary for income tax to closely manage income, deductions, incentives, and avoid double taxation when there is a change in source of income or place of residence.

1.1.1.3. Principles of income tax collection

First principle: Tax collection on the basis of taxable income

Some economists argue that income tax should be based on complete income. According to Haig-Simons' definition, complete income is income in cash and capital gains, whether the profit is real or just a promise - must be the basis for income tax because it is the most accurate measure of taxable capacity. The obstacle to this view in practice is that it is difficult to determine the amount of profit from investment capital when that profit is in potential form (Tax collection on an unreal basis). On the other hand, to have complete income, each entity that generates income has different objective costs (such as costs to overcome risks, medical expenses, etc.). If we rely on complete income as the basis for taxation, it violates the principle of fairness. Therefore, in most countries, taxable income is determined in the following specific cases:

- Income arising from market transactions in monetary form.

- Income arising from market transactions in monetary form minus objective costs associated with the process of generating income (both production costs and other objective costs). Depending on the specific conditions and circumstances of each country, these exempted costs are regulated differently.

- Income of organizations and individuals arising from transactions in the market, but an additional income is exempted to encourage activities following the State's direction.

On the other hand, when there is taxable income, it is also necessary to consider the tax threshold. If the tax threshold is high, the coverage level is low but the income tax is high and vice versa. If the tax threshold is low, it is necessary to determine additional reasonable deductions to cover the source of income. Determining the tax threshold is often more complicated when this parameter always fluctuates according to the actual situation.

Second Principle: Progressive Taxation

In most countries, the principle of progressivity in income tax is respected, especially in personal income tax. Its basis comes from the principle of vertical equity in tax collection. According to the principle of progressivity, the larger the taxable income, the higher the tax rate.

However, there are also many different opinions on the issue of applying the progressive principle to income tax. Some opinions say that when applying the progressive principle, there should be a distinction between the sources of income to promote the regulatory role of income tax. However, there are also opinions that doing so will cause complexity in designing tax rates, because different tax rates should not be used for income arising from different sources of income, but tax exemptions and reductions should be applied to ensure the function of income tax, or progressive tax should be applied in parts.

Whether to apply a fully progressive tax (proportional) or a partially progressive tax depends on the specific conditions of application and how to apply the principle of determining taxable income. If the choice is to determine a high tax threshold, a fully progressive tax is often applied to redistribute income to high-income earners and vice versa. Applying a partially progressive tax is more complicated than the general guarantees, but there are still deductions and exemptions for each part.

Third Principle: Choosing the Time to Determine Taxable Income

The basis for income tax is taxable income. Taxable income is determined within a certain period of time as prescribed by the laws of each country, but usually must ensure the following requirements:

- Ensure fairness in tax collection.

- Ensure the feasibility of tax collection.

- Ensure budget revenue to cover State spending needs.

In practice, many countries in the world have different regulations on the time to determine taxable income. Some countries use annual income as the basis for calculating tax, while others use average monthly income as the basis for calculating tax.

1.1.1.4. Classification of income tax

There are many types of income tax depending on the research perspective and classification criteria. Usually, based on the taxpayer, there is personal income tax and corporate income tax. Based on the nature of income tax, there is the Personal Income Tax, which usually has a very high tax rate of over 50% (even 70%) and the Ordinary Income Tax, which usually has the highest tax rate of no more than 50%.

Income tax is essentially a regulation of income through many stages and is governed by many different subjects, so different measures are needed to collect the correct and sufficient tax. The actual corporate income after leaving a portion if continued to be distributed to shareholders is personal income. Therefore, a series of different types of taxes are needed to complement each other in the application process. However, the most common classification in the world today is still Corporate Income Tax and Personal Income Tax. Specifically, the nature of these two types of taxes is as follows:

- Corporate income tax

The nature of corporate income tax is expressed by its inherent internal attributes. Those attributes are relatively stable through the stages of development. Research on corporate income tax shows that corporate income tax has its own characteristics to distinguish it from other taxes and financial instruments as follows:

+ Firstly, corporate income tax has the characteristic that the taxpayer according to the law is identical to the taxable subject.

By law, the taxpayer is also the last person to pay taxes in a production and business cycle. In other words, the corporate income tax makes it more difficult to shift the tax burden to others.

+ Second, corporate income tax is a non-criminal compulsory transfer of taxpayers' income to the State.

Non-criminal compulsory nature is a basic inherent attribute of tax in general and corporate income tax in particular, it distinguishes corporate income tax from other forms of financial mobilization of the State budget.

This characteristic clearly defines the economic content of corporate income tax as income that is objectively formed and has special social significance - the State's compulsory mobilization. Compulsory distribution in the form of corporate income tax is a method of distribution by the State, the result of which is that a part of the enterprise's income is transferred to the State without any allocation or other benefits for taxpayers.

+ Third, the transfer of income in the form of corporate income tax is not a direct refund.

The non-refundable nature of corporate income tax is manifested in various aspects.

Firstly , the transfer of income through taxes is not reciprocal, meaning that the tax rate that social classes transfer to the State is not entirely based on the level of public goods and services provided by the State. Taxpayers also do not have the right to demand that the State must directly provide public goods and services to them in order to generate income transfers to the State. On the other hand, the level of public service provision by the State is not necessarily equal to the level of transfer.

Second , the income transfer in the form of corporate income tax is not directly refundable, meaning that taxpayers will ultimately receive a portion of public services that the State provides to the whole community; the value of that portion of service is not necessarily equivalent to the amount of tax they pay to the State.

Third, the transfer of income in the form of corporate income tax is prescribed in advance by law.

This feature, on the one hand, shows the high legality of corporate income tax, on the other hand, reflects that this income transfer is not arbitrary but based on certain legal bases and has been predetermined in the Corporate Income Tax Law. The criteria often determined in the Corporate Income Tax Law are taxable subjects, taxpayers, tax rates, specific time limits and other coercive sanctions.

Income transfers in the form of corporate income tax are subject to the influence of economic, political and social factors in certain periods.

Economic factors affecting corporate income tax are often the growth rate of the national economy, prices, markets, fluctuations in the State Budget, etc.

Political and social factors affecting corporate income tax are often the political institutions of the State, the psychology and customs of the population, cultural traditions, etc.

- Personal income tax

Taxable income will be based specifically on the source of income and on the residence characteristics or some other characteristics depending on the laws of each country.

+ Taxpayers are also taxable subjects, so personal income tax can easily cause strong reactions from taxpayers.

Unlike indirect taxes (such as consumption tax, etc.), the tax is already included in the payment price, so it does not greatly affect the buyer's psychology about the tax they have to pay. Direct tax can be understood literally as "The State directly reaches into our pockets and takes our money out", which certainly has a strong impact on the taxpayer's psychology. Therefore, every time the government makes changes in personal income tax policy, such as adjusting tax rates or changing the scope of tax exemptions, it causes strong reactions among the population.

+ Personal income tax is usually a progressive tax .

Countries often build a progressive tax schedule, corresponding to the higher income levels, the higher the marginal tax rate. Therefore, people with higher incomes also pay correspondingly higher tax rates than those with lower incomes.

have lower income levels. Personal income tax contributes to ensuring fairness in society, often called vertical equity and horizontal equity. The relative distance between tax rates will determine the strong or weak progressivity of the tax schedule.

1.1.2. Contents of income tax adjustment

In terms of income tax adjustment, it can be said that it is an adjustment of both the policy, apparatus and mechanism of income tax. However, the scope of income tax adjustment focuses on basic research on income tax policy. Adjusting income tax policy is considered the core of changing income tax. Adjusting income tax apparatus and mechanism are adjustments of income tax management nature. Adjusting income tax policy has many different contents but in general there are 4 basic contents as follows: regulations on determining taxable income, regulations on determining deductions or deductible expenses when calculating income tax, regulations on tax rates, regulations on determining tax incentives. The specific adjustment contents are as follows:

One is: Adjusting the regulations on determining taxable income. In which it is necessary to consider factors such as the origin of income. Because each type of income arising from different sources must be determined differently for taxable income. This content is also an important issue of income tax policy. Adjusting income tax policy will be based on the situation of each stage to tax different types of income for different subjects. In the early stages of creating new markets such as stocks, real estate, etc., priority will often be given to not calculating taxable income.

Second: Adjusting regulations on determining deductions or deductible expenses when calculating income tax. In addition to taxable income, pre-tax income deduction policies are also very important. Income that must be spent on general goals, social goals, humanitarian purposes, etc. is deducted before calculating income tax. Adjusting income tax should also be based on the socio-economic situation of each historical period. Adjusting these contents is also a concern of many social classes, especially in cases of policy changes for the poor.

The elderly, children, and people with disabilities must have someone with income to take care of and support them.

Third: Adjusting regulations on corporate income tax and personal income tax rates. Adjusting tax rates is also the core content of tax policy. Each adjustment must also be based on the requirements of economic development policies in general as well as the socio-economic situation in particular. Most tax rates tend to be simplified but cover a wide range of taxpayers.

Fourth: Adjust the regulations on determining income tax incentives. In addition to adjustments to the main contents such as taxable areas, tax rates, etc., it is also necessary to adjust the content of income tax incentives. Particularly difficult areas and regions, business sectors that need encouragement such as new technology, etc. should be considered for income tax incentives. Adjusting this content is also quite flexible for different stages of economic development.

1.1.3. Principles, methods and procedures for income tax adjustment

1.1.3.1. Principles of income tax adjustment

Income tax is a direct tax, so there are often many major conflicts between interest groups in society. Therefore, adjusting income tax must ensure principles to avoid strong conflicts and social instability. Unlike indirect taxes, taxpayers and tax bearers are different, so when tax is discounted, conflicts rarely occur. However, because of conflicts, we should not accept revenue loss or cause inequality in society. The principles of adjusting income tax include:

- Principle 1 : Tax policy adjustment must ensure fairness and transparency. Although income tax is a direct tax that causes many conflicts between interest groups in society, sometimes the most severe conflicts are not about the content of income tax but about social injustice. Transparency of income tax is also a basic principle of tax policy adjustment because lack of transparency will cause social discontent. Fair and transparent tax policy in each stage is relative but does not lose its principle.

Although there are distinctions for certain regions and industry sectors, the non-adjustable income tax policies have large variations and time

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