13. Types of Tax Flashcards
What are the two main reasons that a government might raise a tax?
- To Finance public expenditure
- To moderate behavior
What are the 8 principles of a good tax?
- Equity and fairness (reflects ability to pay)
- Transparency and visibility
- Certainty
- Efficiency (easy to collect, shouldnt cost more than is raised)
- Convenient payment system
- Simple
- Appropriate revenues
- Minimum tax gap
What is the tax gap?
The gap between the amount theoretically collectable and the amount actually collected
What is hypothecation?
Raising taxes for specific purposes
What is a tax base?
Something that is subject to tax (e.g. income, capital, consumption)
What is the incidence of tax?
The person who pays the tax
What is formal incidence?
The individual/entity who has direct contact with the tax authority (e.g. VAT, the company pays the tax to the government no the consumer)
What is actual of effective incidence?
The individual/entity who bears the end cost of the tax (e.g. VAT added onto the product and so paid for by the consumer)
What is a taxable person?
The entity liable to pay direct tax
What is progressive tax?
Where higher income levels lead to proportionally more tax
What is proportional tax?
Where tax is the same proportion of income at all levels
What is a regressive tax?
Where higher income levels lead to proportionally less tax
What is direct tax?
A tax which cannot be passed on to another taxable person and is paid directly to the government
What are 3 examples of a direct tax?
- PAYE
- Tax on trading income
- Capital taxes
What is indirect tax?
A tax which is collected by intermediaries on behalf of the government, but borne by the final consumer
What are the 5 types of indirect tax?
- Unit taxes
- Ad valorem taxes (e.g. VAT)
- Excise duties (e.g. fuel, alcohol, tobacco)
- Property and wealth taxes
- Consumption taxes (single or multi stage sales tax)
What is a cascade tax?
A multi-stage sales tax where tax is taken at each stage of production, and is a business cost because no refunds are provided by the government
What is VAT?
A multi-stage sales tax where each stage of the production process has VAT charged, but VAT registered traders can claim back any VAT they have paid on inputs. -> Entire burden of VAT passed onto the final consumer
What must a taxable person do in relation to VAT records?
- Issue VAT receipts
- Keep VAT records
- Charge output VAT
- Claim input VAT
- Complete a VAT return on a regular basis
How are standard rated supplies taxed?
At standard VAT rate
How are higher/lower rated supplies taxed?
At a higher/lower rate than standard VAT
How are zero rated supplies taxed (and what are the key examples)?
0% (Non luxury food, childrens clothes)
How are exempt supplies taxed (and what are the key examples)?
Not subject to VAT (finance and insurance)
Can business who make a) zero rated and b) exempt supplies claim back input VAT?
a) Yes
b) No
What are the 6 advantages of the PAYE system?
- Monthly cash flow advantage
- Easier payments and no large bills
- Administration costs borne by employer
- Regular, predictable receipts
- Tax authority has fewer points of contact
- Smaller tax gap
What are the 4 ways of taxing dividends?
- Classical system - taxed separately, so twice
- Imputation system - individual given full credit for tax already paid by company
- Partial imputation system - individual given partial credit for tax already paid by company
- Split rate system - profits for dividends are taxed at a lower rate than others to reduce tax burden
