Capital 1 Flashcards
Objectives of taxation?
- Compulsion: taxpayer cannot choose between paying and not paying
- Revenue collection: taxes are levied to raise revenue for government
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Other objectives:
Political: redistribution of wealth and income
Economic: stimulation of private investment
What are the elemts of tax?
- tax base
- tax rate
- = Statutory tax
- tax credits
- = Tax due
What are the taxable factors that the taxbase depends upon?
- Labour: wages and salaries
- Capital: interest, dividends, business profits, capital gains,
- Consumption: acquisition of services and goods
What are the characteristics of the ideal tax system?
- revenue collection for sufficient and stable revenue
- Efficiency/neutrality detain any effect on people´s preferences to work, invest, save and consume in order to minimise excess burdens, and to maximise economic growth
- vertical and horizontal equity
- minimium costs of administration and complieance
- international competitiveness
What are the 3 objectives of income taxation? (deeper level)
- Revenue colletion
- Fairness: Equity and Ability to pay
- Promotion of other objectives: Political and Economic
What are the principles of fairness?
- Covers the principle of equity and the principle of ability to pay
- Recognized worldwide as guiding principle of income taxation either by constitutional or common law
What is meant with the principles of equity? What are the two forms?
- Horizontal: all forms of income should be subject to tax, and be determined in the same way (= tax base)
- Vertical: redistribution from high-income to low-income households (= tax rate)
What is meant with ability to pay principles?
- People are taxed according to their financial capacity in order to contribute to the provision of public goods and services
Net income is good indicator of ability to pay:
- consideration of professional/business expenes to generate income and private expenses necessary for subsistence
- compensation of losses (carry-back and carry-forward) since PIT is levied on an annual basis
No consideration of private expeses unnecessary for subsistence and expenses not linked with professional activitiees
What are potential conflicts with the principles of fairness?
Under a Schedular income system
Potential conflicts arise because income is determined and/or taxed differently:
- Example: Earned income of €10,000 is taxed progressively at a rate of 40%.
- Interest income of €10,000 is subject to a final withholding tax of 25%.
What is the issue with the concepts of income?
- Ability to pay principle provides no universally valid and accepted notion of income
- Because financial capacity can be determined by both looking at income or consumption
- both serve as indicators for people´s ability to pay taxes
What is the equation of income and consumption?
Wages (W) + Return on Capital (R) = Consumption (C) + Savings (S)
W + R = C + S
What is the takeaway of looking at income and consumption taxes? (When are they similar)?
- Income and consumption can indicate people’s ability to pay taxes
- Without savings and – equivalently – investments, both concepts would result in a similar tax burden
Income and consumption taxes: What are the fundamental differences?
- Returns from savings and deemed returns from investment are exempt from tax if consumption defines the tax base
- But: still subject to tax like other forms of income under an income tax
Example:
- With income tax, we have 40k income and pay tax (25%) = 10k, save 30k,
- With consumption tax we save 40k since we pay 0, and consume everything in year 2, then we have additional savings of 10K 0.1(1-t) = 750 - because we don´t pay taxes in year 1, we have additional savings of the 10k otherwise paid as taxes
What are the reasons for thee strong ooposition against consumption tax?
Example:
- With income tax, we have 40k income and pay tax (25%) = 10k, save 30k,
- With consumption tax we save 40k since we pay 0, and consume everything in year 2, then we have additional savings of 10K 0.1(1-t) = 750 - because we don´t pay taxes in year 1, we have additional savings of the 10k otherwise paid as taxes
- tax exemption of interest income might explain the reasons for– The strong opposition against the consumption tax, and
- The achieved income – as a general rule – as basis of income taxatio
What is the issue with a pure income tax?
A pure income tax should not grant any allowance for:
- savings, i.e. reduction of the tax base, and or
- income from savings, i.e. reduction of the tax rate
–> this would results in a hybrid system of income taxation, which exists in many countries
