Taxation Flashcards
What are the different ways in which a government may raise revenue to finance public expenditure?
- Borrowing from the private sector
- Rents from publicly owned buildings and land
- Admission charges, for example from public museums and monuments
- Revenue from the sale of some public services such as postal services and public transport
- Proceeds from the sale (or privatization) of government-owned industries and other publicly owned assets
- Interest charges on government loans to the private sector and overseas governments
- Taxes on incomes, wealth and expenditures
How may some taxes be avoided legally?
- Taxes on specific goods can be avoided by not buying that good
- Wealthy people and multinational companies can move their wealth to countries with lower tax rates
How are taxes used?
- To raise revenue
- To manage the macroeconomy
- To reduce income inequality after tax
- To discourage spending on imports
- To discourage the consumption and production of harmful products
- To protect the environment
What principles does a good tax follow?
- Equity: taxes should be fair
- Non-distortionary: taxes should not distort sensible economic behaviour
- Certainty: people and firms should be able to plan how much tax they will need to pay in the future
- Convenience: it must be easy to pay taxes
- Simplicity: taxes should be easy to understand
- Administrative efficiency: taxes should be cheap and easy to collect
What are three types of tax system?
- Progressive tax system: % tax rate increases as income increases
- Regressive tax system: % tax rate decreases as income increases
- Proporational/Flat tax system: % tax rate is the same regardless of level of income
What is the difference between national and local taxes?
- National taxes are levied by national governments to pay for public expenditures and to help control the macroeconomy.
- Local taxes are levied by local and regoinal government authorities to provide local public services, and are paid in addition to the national income tax.
What is a direct tax?
A tax levied on the incomes or wealth of individuals or firms that must be paid from their own funds and cannot be passed on to others to pay.
What are some examples of direct taxes?
- Personal income tax
- Corporation (or profits) tax
- Capital gains tax
- Wealth (e.g. inheritance and property) tax
What are the advantages of direct taxes?
- They have a high yield of tax revenue
- Many are progressive and help to reduce inequalities in incomes after tax
- They take account of people’s ability to pay
What are the disadvantages of direct taxes?
- Income taxes can reduce work incentives
- They can reduce enterpries incentives as taxes reduce profit available to entrepreneurs to re-invest in their businesses
- High tax rates can result in tax evasion
What is an indirect tax?
A tax that is applied to the value of transactions or added to the prices of goods or services. The collection and payment of indirect taxes to government is normally the responsibility of producers who will then pass on as much of each tax as they can to consumers through higher prices.
What are some exmaples of indirect taxes?
- Value added tax (VAT)
- Excise duties
- Import tariffs
- User charges
What are the advantages of indirect taxes?
- They are cost effective to collect
- They expand the tax base. Anyone who buys goods and services will pay some indirect taxes
- They can be used to discourage consumption and production of harmful products
- They are flexible, quicker and easier to alter
What are the disadvantages of indirect taxes?
- The cost of collecting taxes falls to businesses
- They are regressive
- Tax revenues are less certain because they depend on spending patterns
- They add to price inflation
- They can encourage tax evasion
What is the budget of a government?
The budget of a government is a forecast or plan of its intended tax revenues and expenditures in a financial year.
