Taxation Flashcards
Define progressive taxes
A tax charged in accordance with the ability to pay
Define regressive taxes
Taxes which take a greater proportion of poorer people’s income, The burden increases as the person’s ability to pay decreases
What is direct tax
A tax that the government collects directly from the tax payer.
Examples of direct tax
Income tax
Capital gains tax
What is indirect tax
Taxes levied on goods and services
Example of indirect tax
VAT
Customs duties
What is tax avoidance
Legal methods of reducing tax
What is tax evasion
Illegal methods of reducing tax
What is the black economy
All economic activity that goes unrecorded in the national income figures
Incidence of tax
The person who eventually pays the tax
What does it mean that the tax system should be both efficient and equitable
It should impose as small a cost on society as possible.
The burden of taxes should be fairly distributed
It should pay for itself
Examples of taxes to change behaviour and make positive externalities
Tax on tobacco and alcohol consumption
Tax on certain energy production to try to encourage a move towards green energy (or even no tax on greener energy)
How are both buyers and sellers worse off when taxes are implemented
Tax rises the price buyer pays
Tax lowers the price seller receives
Example of tax loopholes
In UK, tax breaks up to a certain limit when money is spent on pension fund
What are Adam Smiths 4 Canons of Taxation
Equality
Certainty
Convenience
Economic
What does equality mean in Adam Smith’s 4 canons of taxation
Each person should pay taxes based on their ability to pay
Eg rich pay more than poor
What does certainty mean in Adam Smith’s 4 canons of taxation
Tax payers know what taxes they are liable for and able to plan ahead on this basis
What does convenience mean in Adam Smith’s 4 canons of taxation
Paying taxes should be as easy as possible,
What does economic mean in Adam Smith’s 4 canons of taxation
The cost of collecting and administration of taxes is less than the amount collected
What is average tax rate
Rate of total taxes paid divided by total income
What is marginal tax
The rate of extra taxes paid on top as additional income
What is lump sum tax
Tax that is the same for every income
What is the most efficient tax
Lump sum tax
Why is lump sum tax the most effienxt
Amount owed is not altered by a person’s decisions
The tax does not distort incentives
The tax does not cause deadweight loss
Minimal administrative burden on tax payers
Why do we not use lump sum
Rich and poor would be taxed the same which doesn’t correspond with Adam smiths first canon “equality”
What is the benefit principle
The idea that people should pay taxes based on the benefit they receive from government services
Example of something that is justified for using benefits principle
Petrol, people who use petrol also use roads so tax on petrol should be used to improve the roads
Fair
Toll bridges
What is the ability to pay principle
Tax should be levied on the people according to how well they can take the burden
Vertical equity
The taxpayers with a greater ability to pay taxes should contribute a larger amount
Horizontal equity
Taxpayers with similar abilities to pay should contribute the same amount
What is proportional tax / flat tax
High income and low income earners pay the same fraction of income
What are corporate taxes
Taxes levied on profits that businesses make
Why do people tend to want to increase corporate tax
Not a person, impersonal
However tax eventual falls on people employed in company
A nice quote
Taxes are the prices we have to pay for ….
A civilised society
What is a problem with tax at the moment regarding jobs in Ireland
Social welfare is so generous that there is an incentive not to work
Why does Ireland keep its corporate tax low
As to not discourage investment and in time, increase Employment
When incomes are rising should tax increase or decrease why
Tax should increase
Lessen infiltration on economy
When incomes are falling should tax increase or decrease why
Should decrease
Lessen the pressures on the economy
Advantages of direct taxation
Conforms all four canons
Automatic stabilisers
Disadvantages of direct taxation
High rates discourage workers from increasing their hours
High rates encourage tax avoidance and evasion
High rates encourage black economy
High rates discourage investment
High rates penalise efficient companies
Advantages of indirect taxation
Cost of collection is low Harder to evade tax Doesn’t discourage work Can be used to change behaviour eg cigarettes Act as automatic stabiliser O
Disadvantages of direct taxation
Inflationary
Not equitable
People may switch to alternative goods
2 reasons governments implement taxes``
to raise revenue to pay for services eg health, education.
to influence behaviour eg carbon tax (to internalise externalities)``
why are both buyers and sellers worse off when a good is taxed
tax rises the price that buyer pay
tax lowers the price that sellers receive
when tax is levied on buyers the demand curve shifts ….
downwards by the size of the tax
when tax is levied on sellers, the supply curve shifts …
upwards by the price of the tax
how to calculate tax revenue ie what the gov receives from taxing
size of tax x quantity sold
with elastic supply and inelastic demand, who does more of the tax burden fall on
the buyers
with inelastic supply and elastic demand, who does most of the tax burden fall on
the sellers
if both supply and demand were both elastic who would most of the tax fall on
wouldn’t be much room for tax
examples of standard tax in ireland
prsi usc corporation tax vat carbon tax vehicle tax property tax
what is the consumer tax burden made up
the amount of the tax revenue that previously belonged to the consumer surplus
what is the producer surplus made up of
the amount of the tax revenue that previously belonged to the producer surplus
when will there be no deadweightloss when tax is levied
when both supply and demand are perfectly inelastic
if the quantity sold reduces, will deadweight loss be bigger or smaller
larger as the more the quantity sold is altered from equilibrium, the more the deadwweight loss
what is deadweight loss
the surplus that is lost that once was consumer and producer surplus of those consumers and producers who no longer are partcipating in the market.
This is because the new price is now above some consumers’ willingness to pay. The new profit is lower for for many sellers so they opt out of the market/
