Taxation

Question 1

What is the difference between a direct and a indirect tax?

Answer 1

Direct taxes are directly applied to individuals and firms where as indirect taxes are applied onto goods and services.

Question 2

What are Adam Smiths Cannons of Taxation?

Answer 2

1) The cost of collection should be low relative to the yield of the tax.
2) The timing of collection and the amount paid should be clear and certain.
3) The means of payment should be convenient to the tax payer.
4) Taxes should be levied according to the ability to pay of the individual tax payer. E.g. Income tax

Question 3

What are the new additional cannons of taxation?

Answer 3

5) A good tax leads to the least loss or biggest gain of economic efficiency.
6) A good tax is compatible with foreign tax systems. E.g. The UK’s is comparable with the EU’s.
7) A good tax automatically adjusts to changes in the price level.

Question 4

What are the reasons for taxation?

Answer 4

Cover government expenditure
Correct market failure
Macro economic policy
Redistribution of income