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Economics > Taxation > Flashcards

Taxation Flashcards

1
Q

Four cannons of taxation

A

equity
economy
certainty
convenience

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2
Q

equity cannon

A

system of taxation should take a higher proportion of income in tax as income rises, so ability to pay is taken into account
eg PAYE

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3
Q

certainty

A

the amount paid should be unambiguous, certain and clear
people should know their tax liability at the start of the year
eg USC tax brackets

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4
Q

convenience

A

tax should be levied at a convenient time and manner for the contributor
method should suit the payer, not the gov.
eg VAT as it is included in prices

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5
Q

economy

A

the amount of revenue collected should far exceed the cost of collection
eg PRSI is collected by employers

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6
Q

functions of taxation

A

-to raise money for gov. expenditure
-to achieve some economic objectives;
eg reduce inflation, encourage investment in certain industries
-to redistribute wealth
-acts as an automatic stabiliser
-to achieve desirable social objectives eg plastic bag levy
-to promote enterprise

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7
Q

progressive tax

A

takes a higher % of income from a person as that persons taxable income increases
eg PAYE, USC

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8
Q

regressive tax

A

takes a higher % of income from a low income earner than from a high income earner
it is a flat euro amount levy, doesn’t take ability to pay into account
eg VAT, TV license

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9
Q

proportional tax

A

takes a constant rate of tax from income as income rises

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10
Q

direct taxes

A

tax on all forms of income and wealth

eg PAYE, USC, Corp. Tax

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11
Q

indirect taxes

A

taxes on transactions and spending

eg VAT, Customs Duty

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12
Q

specific taxes

A

are levied at a given absolute amount on each unit of a good sold
eg 10c on a litre of petrol

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13
Q

stealth taxes

A

are applied as a public service charge, not really recognised as a tax
eg water charges

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14
Q

advantages of direct taxation

A
  • progressive, upholding the principle of equity
  • convenient
  • economical, employers collect it and pass it to the revenue commissioners, no fee to the employer
  • certainty of liability, tax rates and tax bands announced in the budget
  • simplifies the government budgeting as national levels of income are well known
  • direct taxes are automatic stabilisers
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15
Q

disadvantages of direct taxation

A

-high rates may discourage work/investment/savings
-encourages tax avoidance and evasion
-can be avoided by those working in the hidden economy
-if there is small tax base, then the burden of tax may be great on those who are paying the tax
-high rates penalise the most efficient companies
(corp tax)

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16
Q

advantages of indirect taxation

A
  • people can reduce the amount of tax they pay by choosing low VAT goods
  • evasion is almost impossible
  • cheap form of tax to administer as producers/retailers collect it free of charge, thus there is economy of tax
  • don’t even realise your’e paying it, thus convenience
  • unlikely to be a disincentive to work
  • can be used by gov. to encourage/discourage spending
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17
Q

disadvantages of indirect taxation

A
  • regressive
  • lacks certainty
  • adds to inflation, may reduce competitiveness of Irish goods
  • increases the cost of living, driving wage increase demands
  • adds to admin costs of the business community (takes up labour time)
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18
Q

ad valorem

A

tax takes a given % of the price of the good

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19
Q

lump sum tax

A

fixed sum of tax levied on a firm irrespective of its level of income/profit

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20
Q

capital gains tax

A

tax on the profits made from the sale of assets

21
Q

capital acquisitions tax

A

tax on gifts/inheritance recieved

22
Q

green taxes

A

promote environmental protection

eg carbon tax on fuel introduced in 2010

23
Q

tax harmonisation

A

refers to the aim of member states within the EU to bring all tax rates in line with one another

24
Q

to ‘broaden the tax base’

A

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

25
Q

tax relief schemes

A

incentives for investments in certain job projects

eg job creation, energy efficiency, urban renewal

26
Q

how can taxation help the government achieve its economical and social aims

A
  • increase tax to decrease consumption
  • impose a levy to discourage waste eg plastic bag levy
  • enforce fines on anti social behaviour eg littering
  • grant tax breaks to encourage activities eg R and D tax credits
  • financial aid to boost enterprise eg local enterprise office grants
  • create infrastructure to enable people and companies to achieve national aims eg better roads
27
Q

why higher taxes during an economic boom

A

to prevent overconfidence

to prevent people overburdening themselves with debt in investments

28
Q

fiscal policy during a boom period

A

increase tax on consumption
reduce or pay off national debt
increase cash balances of the NTMA
implement more stringent oversight of the banking sector, by increasing roles and regulation of the central bank

29
Q

why lower taxes during a recession

A

to boost the economy and build confidence on the part of consumers and investors

30
Q

fiscal policy during a recession

A
  • use state funds received via tax for capital projects that would aid employment and boost economic activity
  • lower tax rates and widen tax brackets
  • design an attractive system for FDI
  • design and offer tax breaks
  • use tax revenue for grants to encourage indigenous irish businesses
31
Q

current fiscal policy

A

gov. taxes certain goods to decrease consumption
gov. spending can be directed at slow growing regions
progressive taxation redistributes wealth
2008 banking crisis saw gov. stepping in to save banks from failing
to stimulate the economy after recession-quantitative easing

32
Q

quantitative easing

A

central banks creating new money and using it to buy assets owned by financial institutions and other firms

33
Q

what is a bond

A

a type of loan by which when you buy a bond, you are lending money to the issuer
sold in €100 trenches with fixed interest (coupon)
coupon is paid every year until the bond reaches the maturity date
principle amount is then repaid

34
Q

corporate or government bonds

A

governments often raise cash/borrow to pay for budgetary requirements
National Treasury Management Agency arrange bond issues and trading for the gov.

35
Q

if you want to cash in a bond before its maturity

A

do not have to wait until date of maturity
they are traded openly on the stock exchanges
may sell for a higher/lower price to other investors

36
Q

bond yield

A

the amount of return an investor earns on a bond

nominal yield = interest ÷ face value
current yield = interest ÷ current market value

37
Q

bond yield vs bond price

A

as bond prices increase, bond yield falls

inverse relationship, vice versa

38
Q

when do bond yields usually fall

A

when economic conditions push markets towards safer investments ie gov. backed bonds
such as:
high rates of unemployment
recession or slow economic growth
as interest rates increase, bond prices also tend to fall

39
Q

origins of the 2008 banking crisis

A

Sub Prime Lending
normal banking practice is to issue loans to those who show an ability to repay
However, particularly in USA, loans were granted to those with low credit ratings, those with less than ideal status
these lenders charged much higher interest rates, however there was a much higher risk of default of debt

40
Q

default of debt

A

non repayment of debt

41
Q

irish situation during banking crisis

A

banks were highly exposed due to high levels of borrowing during Celtic Tiger
Property boom left huge loans to developers who now couldn’t get credit and repay loans
been in deep depression until 2013

42
Q

credit crunch

A

a reduction in the availability of loans to businesses and individuals and/or the imposition of more severe conditions on the granting of loans

43
Q

consequences of a credit crunch

A

many viable businesses don’t have access to credit= shut down
gov revenue reduced
less consumer spending= effect on businesses
prolongs recession as businesses cannot trade
people seeking mortgages cannot get them

44
Q

National Asset Management Agency (NAMA)

A

created by gov in 2009
functions as a bad bank
acquires property development loans from banks in return for gov. bonds
aims to improve the availability of credit in Ireland

45
Q

consequences of NAMA

A

banks were protected from insolvency or very serious liquidity problems
property market was supported to avoid rock bottom sales and losses
banks received fresh capital to lend out
gov. had to cut back on public expenditure to fund this

46
Q

why : regulation of the banking sector

A

to protect consumers- especially depositors
to ensure proper lending policies- avoids reckless lending
to strengthen the stability of the banking system
improved economic stability/confidence
less need for gov. intervention/emergency funding
no need for assistance from outside agencies ie EU

47
Q

National Asset Management Agency (NAMA)

A

created by gov in 2009
functions as a bad bank
acquires property development loans from banks in return for gov. bonds
aims to improve the availability of credit in Ireland

48
Q

consequences of NAMA

A

banks were protected from insolvency or very serious liquidity problems
property market was supported to avoid rock bottom sales and losses
banks received fresh capital to lend out
gov. had to cut back on public expenditure to fund this

49
Q

why : regulation of the banking sector

A

to protect consumers- especially depositors
to ensure proper lending policies- avoids reckless lending
to strengthen the stability of the banking system
improved economic stability/confidence
less need for gov. intervention/emergency funding
no need for assistance from outside agencies ie EU

Economics (22 decks)

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