Introduction to tax and tax equity Flashcards
User charges (benefit taxes)
These are prices charged for the delivery of certain public goods and services. e.g. Toll roads
Administrative fees
similar to user charges but differ slightly, as the
service/benefit received in return for the fee is defined rather than broadly and imprecisely.
e.g. Business licences, TV licence, fishing licenses and vehicle licences, parking ticket
and fines
Borrowing
Used to finance capital expenditure
Can occur domestically or internationally. Borrowed money must be spend on productive activities
Inflation taxation
If government spending is financed in such a way that increases money supply, this financing may eventually raise the price levels. Inflation changes the real value of public debt.
Taxes
Taxes are transfer of resources from persons or economic units to the government and are compulsory or legally enforced
Taxes can be imposed on what three tax bases:
Income
Wealth
Consumption
Tax base structure
describes the relationship between the tax rate and the tax base
Tax rate
the amount of tax levied per unit of the tax base
What are the three variants of tax rates
- Proportional tax
- Progressive tax
- Regressive tax
Proportional tax
Average tax rate remains constant with respect to variations in the tax base. (e.g. corporate income tax- 20% of income also called a flat rate tax)
Progressive tax
Average tax rate increases as the tax base increase. (e.g. personal income tax- tax brackets)
Regressive tax
Average tax rate decreases as the tax base increases. ( value added tax- in ration with you income it regresses) .
This type of tax has no correlation with an individual’s earnings or
income level.
A general tax (broad based tax)
One that taxes the entire tax base and allows for no exemptions.
example: VAT, income tax that taxes all sources of income without any tax deductions
Selective tax (narrow based tax)
Is imposed on one or a few products. -> the whole tax base is therefore not taxed.
example: excise tax on cigarettes, wine, etc
Specific tax/unit tax
When a fixed amount is imposed per unit of the product.
Example: Excise duties on sparkling wine (R9,75 per litre)
Ad valorem tax
Is imposed when on the value of products
The tax is usually levied as a rate (%) of the value (price of commodity)
Example: luxury goods (sun protection or perfume are taxed are rates between
7-9% of their price)
Direct taxes
Imposed directly on individuals and companies
Example: personal income tax and company tax
Indirect taxes
Are imposed on commodities or market transaction and are likely to be shifted
Example: fuel levies, VAT
Properties of a good tax
Equity: Promote an equitable/ fair distribution of income
- Benefit principle (11.4.1) - Ability to pay principle (11.4.2)
Economic efficiency: Taxes should be designed in such a way that their distorting
effects on the choices made by tax payers are minimised.
Administrative efficiency: A good tax systems administration and compliance cost
have to be kept low. (implies tax simplicity and tax certainty)
Flexibility: A good tax should be flexible enough to facilitate macroeconomic
stability and economic development.
Benefit principle of tax equity
Stipulates that a tax burden of the government expenditure be apportioned to taxpayers in accordance with the benefits each receives
FORCED CARRYING
someone being made to carry a heavier-than proper burden.
example: Non-users forced to pay for roads and bridges
EARMARKED TAXES
Charges assigned to special funds or accounts for financing of services indirectly linked to the sources of the funds
example: Fuel levies used only for road construction
Ability to pay principle of tax equity
people with equal capacity to pay the same amount of tax (horizontal equity) and for people with a greater capacity to pay more (vertical
equity).
Horizontal vs Vertical equity
HORIZONTAL EQUITY: People with equal capacity should pay the same amounts of tax (i.e. similar treatment for tax purposes of people in similar economic circumstances)
VERTICAL EQUITY: people with greater capacity should pay more tax (i.e. individuals in different economic circumstances should be
treated differently for tax purposes)
