13. Types of Tax

Question 1

What are the two main reasons that a government might raise a tax?

Answer 1

• To Finance public expenditure

- To moderate behavior

Question 2

What are the 8 principles of a good tax?

Answer 2

1. Equity and fairness (reflects ability to pay)
2. Transparency and visibility
3. Certainty
4. Efficiency (easy to collect, shouldnt cost more than is raised)
5. Convenient payment system
6. Simple
7. Appropriate revenues
8. Minimum tax gap

Question 3

What is the tax gap?

Answer 3

The gap between the amount theoretically collectable and the amount actually collected

Question 4

What is hypothecation?

Answer 4

Raising taxes for specific purposes

Question 5

What is a tax base?

Answer 5

Something that is subject to tax (e.g. income, capital, consumption)

Question 6

What is the incidence of tax?

Answer 6

The person who pays the tax

Question 7

What is formal incidence?

Answer 7

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)

Question 8

What is actual of effective incidence?

Answer 8

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)

Question 9

What is a taxable person?

Answer 9

The entity liable to pay direct tax

Question 10

What is progressive tax?

Answer 10

Where higher income levels lead to proportionally more tax

Question 11

What is proportional tax?

Answer 11

Where tax is the same proportion of income at all levels

Question 12

What is a regressive tax?

Answer 12

Where higher income levels lead to proportionally less tax

Question 13

What is direct tax?

Answer 13

A tax which cannot be passed on to another taxable person and is paid directly to the government

Question 14

What are 3 examples of a direct tax?

Answer 14

1. PAYE
2. Tax on trading income
3. Capital taxes

Question 15

What is indirect tax?

Answer 15

A tax which is collected by intermediaries on behalf of the government, but borne by the final consumer

Question 16

What are the 5 types of indirect tax?

Answer 16

1. Unit taxes
2. Ad valorem taxes (e.g. VAT)
3. Excise duties (e.g. fuel, alcohol, tobacco)
4. Property and wealth taxes
5. Consumption taxes (single or multi stage sales tax)

Question 17

What is a cascade tax?

Answer 17

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

Question 18

What is VAT?

Answer 18

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

Question 19

What must a taxable person do in relation to VAT records?

Answer 19

1. Issue VAT receipts
2. Keep VAT records
3. Charge output VAT
4. Claim input VAT
5. Complete a VAT return on a regular basis

Question 20

How are standard rated supplies taxed?

Answer 20

At standard VAT rate

Question 21

How are higher/lower rated supplies taxed?

Answer 21

At a higher/lower rate than standard VAT

Question 22

How are zero rated supplies taxed (and what are the key examples)?

Answer 22

0% (Non luxury food, childrens clothes)

Question 23

How are exempt supplies taxed (and what are the key examples)?

Answer 23

Not subject to VAT (finance and insurance)

Question 24

Can business who make a) zero rated and b) exempt supplies claim back input VAT?

Answer 24

a) Yes

b) No

Question 25

What are the 6 advantages of the PAYE system?

Answer 25

1. Monthly cash flow advantage
2. Easier payments and no large bills
3. Administration costs borne by employer
4. Regular, predictable receipts
5. Tax authority has fewer points of contact
6. Smaller tax gap

Question 26

What are the 4 ways of taxing dividends?

Answer 26

1. Classical system - taxed separately, so twice
2. Imputation system - individual given full credit for tax already paid by company
3. Partial imputation system - individual given partial credit for tax already paid by company
4. Split rate system - profits for dividends are taxed at a lower rate than others to reduce tax burden