Macro A2 - Taxation Flashcards
Main types of tax:
Income tax
National insurance
VAT
Capital gains tax
Stamp duty
Tobacco, spirit, wine & beer duties
Fuel duties
Betting & Gambling duties
Air passenger duties
Insurance premiums tax
Landfill tax
Climate change levy
Aggregates levy
Indirect tax
Levied on goods & services
Examples of Indirect tax
VAT
Sugar tax
Sales tax
Direct tax
Levied directly on individuals & companies
Examples of direct taxes
Corporation tax
Income tax
Progressive tax
A tax where the marginal rate of tax rises as income rises
Examples of Progressive tax
Income tax
Personal Allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £150,000 40%
Additional rate Over £150,000 45%
Proportional tax
The margin rat e of tax is constant leading to a constant average rate of tax
Examples of Proportional tax
National insurance
Regressive tax
The rate of tax paid falls as income rises
Examples of Regressive tax
Duties on tobacco & alchol
A good tax system should be (Adam smith)
Low cost of collection.
Timing and amount of collection should be clear and certain.
Should be convenient to the taxpayer.
Should be levied according to the ability to pay.
Disadvantages of taxation
High marginal rates of tax discourages economic activity.
High corporation tax prevents firms from producing.
High income tax spots people from working.
The Laffer curve
Shows the relationship between economic activity and taxation. It suggests that there is a optimum tax rate that maximises total tax revenue
Reasons that tax revenues may fall if the tax rate increases
Tax avoidance
Tax evasion
“Brain drain” effect
Disincentives to work
Tax avoidance
Tax avoidance is the legal usage of the tax regime in a single territory to one’s own advantage to reduce the amount of tax that is payable by means that are within the law
Tax evasion
Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others
The “brain drain” affect
Brain drain is a slang term that indicates a substantial emigration or migration of individuals. A brain drain can result from turmoil within a nation, the existence of favourable professional opportunities in other countries, or a desire to seek a higher standard of living.
Evaluating the Laffer curve
Not just tax that influences if people work.
Some are on fixed/0 hour contracts so dont know how much they actually work.
If they get tax cuts it may cause people to work less anyway.
Cuts in indirect tax may increase AD.
How tax distributes income
Taxes on higher incomes more than those on lower income.
Increase in VAT leads to unfair income distribution (poorer people pay more as a percentage).
Raise in top rate of income tax leads to fairer distribution.
Effect of tax rates on Real output & employment
Increase in tax reduces AD (income tax)
Increase in tax reduces AS (VAT, Excise duty)
How taxation affects trade balance & FDI
Increase in investment in the economy and increases tax revenue for the Government.
Some countries encourage FDI investment by Lower tax rates (corporation tax).
FDI
Foreign direct investment (FDI) is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.
Tax evasion
Tax avoidance involves using legal loopholes to avoid a liability to pay tax to a government.
Tax avoidance
Tax evasion means concealing income or information from tax authorities and it’s illegal.
Uk tax avoidance & tax evasion figures
Latest HMRC estimate of non-compliance £32bn, or 5.1% of total tax revenues
