Government - Taxation

Question 1

What are the four canons of taxation by Adam Smith

Answer 1

Equity, economy, certainty, convenience

Question 2

Describe equity

Answer 2

The system of taxation should take a higher proportion of income in tax as income rises or the ability of each person to pay must be taken into account.

Question 3

Describe Economy

Answer 3

The amount of revenue collected should exceed cost of collection.

Question 4

Describe certainty

Answer 4

The amount paid should be unambiguous, the and clear.

Question 5

Describe convenience

Answer 5

Tax should be levied at a convenient time and manner for the contributor.

Question 6

Tax Avoidance

Answer 6

Arranging one’s tax affairs within the law as to minimise tax liabilities.

Question 7

Tax Evasion

Answer 7

Reducing tax liabilities by making false returns or not making any returns at all.

Question 8

Imposition of Tax

Answer 8

The imposition or impact of taxation refers to the people or companies on whom the tax is actually levied or placed i.e. imposed.

Question 9

Incidence of Tax

Answer 9

Refers to the individual who actually pays the tax. Whether the imposition of incidence of tax are the same depends on the relative price elasticity of demand.

Question 10

Tax Harmonisation

Answer 10

Refers to the aim of members of the EU and other trading blocs to move all tax rates to the same rates i.e. align with each member state/country.

Question 11

Direct Tax

Answer 11

Taxes on income and wealth e.g. PAYE (Income tax)

Question 12

Indirect Tax

Answer 12

Tax on transactions/spending e.g. VAT

Question 13

Regressive Tax

Answer 13

Tax that takes a higher percentage of income from a low-income worker than a high-income worker.

Question 14

Progressive Tax

Answer 14

Take that takes a higher percentage of income as that peron’s taxable income rises.

Question 15

Outline two other principles which could be considered in a modern tax system.

Answer 15

A tax system should have a limited disincentive effect on work / saving

1. ) If the rate of personal income tax is considered too high (Ireland’s effective highest rate is 51%)
2. ) + large proportion of additional income is taxed away = discourage people to supply additional effort or labour.

3.) Plans for a higher rate of income tax to be charged on people earning over
€100,000.

4.) = deter foreigners from working in Ireland.
- The current rate of DIRT of 37% may deter
people from saving.

Taxes should have a stabilising impact on the economy thus developing into automatic stabilisers

1. ) Tax system should prevent the level of economic activity rising too fast
   i. e otherwise during a period of economic growth.
2. ) Similarly in a recession, the amount collected in taxes falls
3. ) the decrease in demand is not as great as it would otherwise be

Taxes should aid the redistribution of income.

A good tax system should help the government redistribute income from the rich to the poor
/progressive taxes allow the government to do this.

Question 16

Outline possible economic consequences of the Irish Government shifting the burden of taxation from
direct taxation to indirect taxation.

Answer 16

Encourages enterprise, investment, employment and employment promotion. (P)

1. ) Lower rates direct tax cause incentive for workers and companies.
   i. e direct taxes are progressive.
2. ) More take-home pay = inc. incentive to work.
3. ) Lower rate direct tax = inc. FDI.

Moving from direct to indirect can make the tax system more regressive (N)

1. ) Indirect taxes = regressive.
2. ) Def. of regressive!!
3. ) e.g 2010 carbon tax = higher cost of purchase.
4. ) Indirect taxes not equitable + define.

Evasion is more difficult with indirect tax

1. ) Indirect tax e.g. VAT is included in the selling price of the good or service (P)
2. ) Indirect tax - payments and transactions.
3. ) = impossible to evade.
4. ) If good bought, must pay tax for that good.

Revenue collected is not as certain with indirect tax (N)

1. ) Revenue collected is not as predictable as that from direct taxation.
2. ) Hinder the government’s financial planning.
3. ) Indirect taxes can distort demand patterns = more difficult to predict the amount of revenue that will be collected

Question 17

Taxation Revenues

Answer 17

Incomes received by the government in the form of direct & indirect taxes, and used in
the running of the country.

Question 18

Broaden the Tax Base

Answer 18

Increasing the number of people/areas on which tax is levied on

Question 19

Outline two reasons why the Minister for Finance regularly taxes goods such as alcohol, cigarettes and
petrol in the Government’s annual budget.

Answer 19

1. ) Inelastic Demand
2. ) ID = QD reduce slightly because of inc.
3. ) Gov. collect more TR.

Goods with Social Consequences

1. ) Consump. has other consq. e.g. health issues/enviromental damage.
2. ) = Helps discourage consump. of goods.
3. ) Use for extra healthcare/Save expense on healthcare.

To encourage public transport

1. ) Car more expensive = pt more attractive.
2. ) Gov. reducing emmissions.

Limit tax evasion

1. ) Goods have inelastic demand = cons. continute to purch.
2. ) Inc. tax in price = more diff. to evade.

Question 20

Outline the functions of taxation.

Answer 20

Automatic Stabilisers

1. ) Avoid wide fluctuations in economic cycle.
2. ) = more when eco. well
3. ) = less when eco. perform poorly.

Social Objective

1.) Discourage smoking and drinking/pollution

Promote enterprise

1.) To help industry through subsidies/grants and other services can be provided to help industry
and encourage enterprise e.g. County Enterprise Boards.

Finance Goverment Activities

To finance all government activities e.g. running of civil service, wages of Public Sector
workers.

Question 21

Tax Harmonisation

Answer 21

Refers to the aim of members of the EU and other trading blocs to move all tax rates to the same rates i.e. align with each member state/country.

Question 22

Specific Tax

Answer 22

A specific tax is applied at a fixed rate per physical unit of a good taxed, regardless of its price.

E.g. car tax is levied on the size of the engine irrespective of whether the car is new or 20 years old.

Question 23

Stealth Tax

Answer 23

A stealth tax is applied so that it is largely unnoticed or not recognised as a tax e.g. water charges.