Unit 8: Taxation

Question 1

What is the definition of personal income tax/corporate income tax/customs duty/excise tax/…?

Answer 1

1. Individual income tax is the tax imposed on individual incomes.
2. Corporate income tax is the tax levied on corporate incomes.
3. Sales taxes are the taxes imposed on sales.
4. Customs duties are the taxes imposed on imports.
5. Excise taxes are the taxes imposed on special goods and services.
6. VAT is the tax imposed on each stage of production excluding the already-taxed costs from previous stages.
7. Capital gain tax is the tax imposed on profits made by selling assets.
8. Capital transfer tax is the tax imposed on gifts or inheritances over a certain value.
9. Wealth tax is the annual tax imposed on people’s fortunes.

Question 2

What are progressive taxes?

Answer 2

Progressive taxes are the taxes imposed at a higher rate on higher incomes.

Question 3

What are regressive taxes?

Answer 3

Regressive taxes are the taxes imposed at a certain tax rate on every value.

Question 4

What are direct/indirect taxes?

Answer 4

1. Direct taxes are the taxes in which the tax payer has to contribute tax bills directly to the tax offices.
2. Indirect taxes are the taxes in which the producers/providers contribute the tax bills to the tax offices instead of the tax payer.

Question 5

What is tax avoidance/tax evasion?

Answer 5

1. Tax avoidance means reducing tax bills to a legal minimum.
2. Tax evasion means making false declarations to the tax offices.

Question 6

What are loopholes in tax laws?

Answer 6

Loopholes in tax laws are the legal ways in which individuals/firms can avoid paying taxes.

Question 7

What are perks?

Answer 7

Perks are non-pay benefits such as company’s cars, free health insurance, subsidized lunches, bonuses, other allowances, etc.

Question 8

What are tax shelters?

Answer 8

Tax shelters mean delaying the payment of taxes.

Question 9

What are tax heaven?

Answer 9

Multi-national corporations can avoid taxes by setting up their subsidiaries in countries with low tax rates.

Question 10

What are tax deductibles?

Answer 10

Tax deductibles refer to the amounts of money subtracted from the taxable money. For example: Individuals may donate a part of their incomes to charity funds and this money isn’t taxed.

Question 11

Criminal organizations:

Answer 11

Criminal organizations pass their money through series of companies in very complicated transactions in order to launder their money and they are ready to pay taxes.

Question 12

What is the primary function of taxation/functions of some different kinds of taxes?

Answer 12

The primary function of taxation is to raise revenue for government spending. Different types of taxes have different functions:

1. The function of excise tax is to limit the consumption of unnecessary goods and services.
2. The function of income taxes is to redistribute wealth, thus limit the gap between the rich and the poor.
3. The function of corporate income tax is to encourage capital investment by permitting various methods of accelerated depreciation accounting.
4. The function of payroll taxes is to ensure social security.
5. The function of customs duty is to protect the local producers of the same goods.

Question 13

What are advantages and disadvantages of the tax system?

Answer 13

Taxation has some advantages, For example: one advantage of income taxes is to redistribute wealth and limit the gap between the rich and the poor.
But there are disadvantages in the tax system. One disadvantages of income taxes is that business profits are taxed twice, via corporate income tax on the company’s profits and on dividends via personal income tax.
Another disadvantage of income taxes is to discourage people to work harder and invest more, because higher incomes will be liable to higher tax rates.
Disadvantage of regressive taxes is that poorer people need to spend a larger proportion of their income on consumption than the rich.

Question 14

How do firms/individuals avoid paying taxes?

Answer 14

Individuals reduce tax bills (tax payables) to a legal minimum by:
1. receiving perks instead taxable money (loopholes in tax law)
2. investing a part of their incomes in life insurance policies, pension funds, or other investments to delay paying taxes until the future. (tax shelters)
3. having tax deductibles (donations to charities)
4. increasing costs to reduce taxable incomes
Firms can delay the payment of taxes by bringing forward the depreciations of fixed assets or defining costs of goods sold by applying LIFO method. It means that companies can base on loopholes in tax laws to avoid or delay paying taxes.

Question 15

How do firms/individuals evade taxes?

Answer 15

Individuals evade paying taxes, such as:
1. self-employed people (freelancers such as tailors, photographers, artists, etc) or people with part-time jobs don’t declare their incomes to the tax offices.
2. people make false declarations about their incomes to the tax offices.
Firms evade paying taxes by:
Making false declarations on costs to reduce taxable profits.

Question 16

SUMMARY

Answer 16

There are some main ideas in Unit 8: functions of taxation, fairness and unfairness of tax system, tax avoidance and tax evasion.
Firstly, the primary function of taxation is to raise revenues for G spending. Specifically, different types of taxes have different functions. For example: The function of excise tax is to limit the consumption of unnecessary goods and services while the function of income taxes is to redistribute wealth, thus limit the gap between the rich and the poor, etc.
Secondly, taxation has some advantages and disavantages. For example: one advantage of income taxes is to redistribute wealth and limit the gap between the rich and the poor. But there are disadvantages in the tax system. One disadvantages of income taxes is that business profits are taxed twice, via corporate income tax on the company’s profits and on dividends via personal income tax. Another disadvantage of income taxes is to discourage people to work harder and invest more, because higher incomes will be liable to higher tax rates. Disadvantage of regressive taxes is that poorer people need to spend a larger proportion of their income on consumption than the rich.
Thirdly, tax avoidance means reducing tax bills to a legal minimum. For example: Individuals reduce tax bills (tax payables) to a legal minimum by: receiving perks instead taxable money, investing a part of their incomes in life insurance policies, pension funds, or other investments to delay paying taxes until the future, etc. Firms can delay the payment of taxes by bringing forward the depreciations of fixed assets or defining costs of goods sold by applying LIFO method.
Finally, tax evasion means making false declarations to the tax offices. For example: individuals evade paying taxes, such as: self-employed people (freelancers such as tailors, photographers, artists, etc) or people with part-time jobs don’t declare their incomes to the tax offices, people make false declarations about their incomes to the tax offices. Firms evade paying taxes by making false declarations on costs to reduce taxable profits.