C. Principles of taxation Flashcards
Which 4 characteristics of good tax did Adam Smith propose in the Wealth of Nations?
fair-reflect person’s ability to pay
absolute no arbitrary
convenient-easy to pay
efficient-low collection costs
What are 3 major principles of good tax?
equity-fairly levied between tax payers
efficiency-cheap and easy to collect
economic effects-how it is collected
What ten principles did the American Institute of CPAs list as good tax policy?
equity and fairness transparency and visibility certainty economy in collection convenience of payment simplicity appropriate government revenues minimum tax gap neutrality economic growth and efficiency
What is direct tax?
imposed directly on person/enterprise required to pay the tax
i.e on salaries, profits, chargeable assets, income tax, capital gains tax, corporation tax
What is indirect tax?
tax imposed on one part of the economy but tax burden is passed to another
e.g sales tax such as VAT, burden on consumer but paid by store
What is a tax base?
something that is liable for tax
e.g income, capital, wealth, consumption
What is incidence?
The distribution of the tax burden i.e who is paying the tax
Formal vs actual incidence
Formal:direct payment to authorities
Actual/effective :end up bearing cost of tax
With VAT, formal incidence on shop but actual on customer
Who is the taxable person?
person accountable for the tax payment i.e individual or entity
What is a competent jurisdiction?
tax authority that has the legal power to assess and collect taxes
- tax law is enforceable by sanctions (fines/imprisonment)
- usually combined responsibility of the central govt and local authorities
What is hypothecation?
certain taxes are devoted entirely to certain types of expenditure e.g road tax, congestion charge pays for transport in area
What is the tax gap?
gap between the tax collectable and what is actually collected
authorities aim to minimise this
What are the 3 types of taxes?
Progressive: as income increases, proportion % increases
-UK income tax
Proportional:same % as income rises
Regressive:as income increases, proportion % decreases
-UK NI contributions
What are the sources of tax rules?
- legislation produced by national govt e.g Finance Acts of UK
- Precedents based on previous legislation e.g UK tax bulletins
- Directives from intern. bodies e.g EU guidelines on VAT
- Agreements between different countries such as double tax treaties e.g US/UK (avoid paying twice)
What are the two types of direct tax?
Tax on trading income:tax base is profits of main business activity
Capital taxes:gains made on disposal of investments and other non-current assets
How is tax on trading income calculated?
accounting profit LESS income exempt disallowable expenses accounting depreciation LESS tax depreciation = taxable profit
How is capital gains tax calculated?
some countries base it on cost, some allow for inflation
in the UK, cost is indexed using RPI
Chargeable gain= proceeds-costs to sell-cost of original asset-costs to buy-enchancement costs-indexation allowance
Types of indirect tax?
unit tax:on number of/weight of items e.g excise duties
ad valorem taxes:based on value of item e.g sales tax
Examples of indirect tax?
Excise duties Property taxes Wealth taxes Consumption taxes - single and multi stage Cascade tax VAT
What is excise duties?
tax on certain items to discourage purchase, pay for extra costs e.g healthcare or tax luxuries
i.e alcohol, tobacco, motor vehicle tax
What characteristics make a commodity more suitable for excise duties?
few large producers
inelastic demand with no close substitutes
large sales volumes
easy to define products covered by duties
What are property taxes?
tax based on capital value or annual rental value of property
USA also taxes on cars, livestock and boats
What is a wealth tax?
tax on an individual’s or their enterprise’s total wealth (including pension funds, insurance policies and works of art)
What is consumption tax?
tax imposed on consumption of good and added to purchase price.
2 types:
single stage:at one level of production
multi-stage:charges each time product is sold i.e cascade tax or VAT