Chapter 1: Features of Taxation and the Regulatory Environment

Question 1

What are the characteristics of a ‘good tax’?

Answer 1

Fair (reflect a person’s ability to pay

Absolute (certain not arbitrary)

Convenient (easy to pay)

Efficient (low collection costs)

Question 2

What are the 3 major principles of a good tax policy?

Answer 2

Equity – fairly leveled between one taxpayer to another

Efficiency – cheap and easy to collect

Economic effects – reflect the individual’s ability to pay

Question 3

What is Formal and Informal Incidence?

Answer 3

Formal Incidence – the person who has direct contact with the tax authorities i.e., who is legally obliged to pay the tax

Actual / Effective Incidence – the person who ends up bearing the cost of the tax i.e., who actually bears the burden of tax

Question 4

What are the 3 types of taxes and their definitions?

Answer 4

Progressive taxes – take an increasing proportion of income as income rises

Proportional taxes – take the same proportion of income as income rises

Regressive taxes – take a decreasing proportion of tax as income rises

Question 5

What is the difference between Direct and Indirect Taxes?

Answer 5

Direct taxes – imposed directly on the person or enterprise required to pay the tax e.g., salaries, tax on business profits

Indirect taxes – imposed on one part of the economy with the intention that the tax burden is passed onto another e.g., VAT

Question 6

What is the pro-forma for Tax on Trading Income?

Answer 6

Accounting profit
Less income exempt from tax or taxed under other rules
Add: Disallowable expenses
Add: Accounting Depreciation
Less: Tax Depreciation

Taxable Profit

Question 7

What is the pro-forma for Capital Taxes?

Answer 7

Proceeds
Less: Cost to sell the asset

Net proceeds
Less: Cost of original asset
Less: Costs to purchase the asset
Less: Enhancement costs
Less: Indexation allowance

Chargeable gain

Question 8

What are the 2 types of Indirect Taxes?

Answer 8

Unit Taxes – based on the number or weight of items e.g., excise duties

Ad valorem taxes – based on the value of items e.g., sales tax

Question 9

What are examples of Indirect Taxes?

Answer 9

Excise duties
Property taxes
Wealth taxes
Consumption taxes
Cascade tax
VAT

Question 10

What is the difference between Tax Avoidance and Tax Evasion?

Answer 10

Tax Avoidance – tax planning to arrange affairs, within the scope of the Law, to minimize tax liability e.g., setting up a subsidiary overseas in a low tax economy

Tax Evasion – illegal manipulation of the tax system to minimize the tax liability e.g., under-declaring income