Taxation Flashcards
Four cannons of taxation
equity
economy
certainty
convenience
equity cannon
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
certainty
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
convenience
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
economy
the amount of revenue collected should far exceed the cost of collection
eg PRSI is collected by employers
functions of taxation
-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
progressive tax
takes a higher % of income from a person as that persons taxable income increases
eg PAYE, USC
regressive tax
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
proportional tax
takes a constant rate of tax from income as income rises
direct taxes
tax on all forms of income and wealth
eg PAYE, USC, Corp. Tax
indirect taxes
taxes on transactions and spending
eg VAT, Customs Duty
specific taxes
are levied at a given absolute amount on each unit of a good sold
eg 10c on a litre of petrol
stealth taxes
are applied as a public service charge, not really recognised as a tax
eg water charges
advantages of direct taxation
- 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
disadvantages of direct taxation
-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)
advantages of indirect taxation
- 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
disadvantages of indirect taxation
- 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)
ad valorem
tax takes a given % of the price of the good
lump sum tax
fixed sum of tax levied on a firm irrespective of its level of income/profit
capital gains tax
tax on the profits made from the sale of assets
capital acquisitions tax
tax on gifts/inheritance recieved
green taxes
promote environmental protection
eg carbon tax on fuel introduced in 2010
tax harmonisation
refers to the aim of member states within the EU to bring all tax rates in line with one another
to ‘broaden the tax base’
increase the number of people/areas on which the tax is levied
tax relief schemes
incentives for investments in certain job projects
eg job creation, energy efficiency, urban renewal
how can taxation help the government achieve its economical and social aims
- 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
why higher taxes during an economic boom
to prevent overconfidence
to prevent people overburdening themselves with debt in investments
fiscal policy during a boom period
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
why lower taxes during a recession
to boost the economy and build confidence on the part of consumers and investors
fiscal policy during a recession
- 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
current fiscal policy
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
quantitative easing
central banks creating new money and using it to buy assets owned by financial institutions and other firms
what is a bond
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
corporate or government bonds
governments often raise cash/borrow to pay for budgetary requirements
National Treasury Management Agency arrange bond issues and trading for the gov.
if you want to cash in a bond before its maturity
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
bond yield
the amount of return an investor earns on a bond
nominal yield = interest ÷ face value
current yield = interest ÷ current market value
bond yield vs bond price
as bond prices increase, bond yield falls
inverse relationship, vice versa
when do bond yields usually fall
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
origins of the 2008 banking crisis
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
default of debt
non repayment of debt
irish situation during banking crisis
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
credit crunch
a reduction in the availability of loans to businesses and individuals and/or the imposition of more severe conditions on the granting of loans
consequences of a credit crunch
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
National Asset Management Agency (NAMA)
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
consequences of NAMA
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
why : regulation of the banking sector
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
National Asset Management Agency (NAMA)
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
consequences of NAMA
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
why : regulation of the banking sector
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
