Government Taxation - Edexcel Unit 4

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Harry Bindloss
GOVERNMENT TAXATION
Taxation: A means by which governments finance their expenditure by imposing charges on
citizens and corporate entities. Governments use taxation to encourage or discourage
certain economic decisions.
Reasons for paying tax:
Wealth redistribution
Can be used as a weapon against the consumption of demerit goods and negative
externalities
Raises money from government expenditure
Protection for environmental damage
Fiscal tool for controlling inflation and employment
Can be used to make imports more expensive
There are three different types of taxation that the government can choose to use:
Progressive Tax
This is a system by which tax is proportional to income. This means that a person pays more
tax they more they earn.
Regressive Tax
A regressive tax system takes a smaller proportion of income in tax as incomes rises. It may
be considered unfair to people on low incomes because a much larger fraction of their
income is taken as tax.
Proportional Tax
This is where the proportion of income taken in tax is the same whatever the level of
income.
Direct and Indirect Taxation
Direct Tax: A tax levied directly on factor earnings and wealth. Paid by individuals on wages,
rent, interest and profits in the form of income tax, council tax, inheritance tax capital gains
tax and National Insurance. This tax is levied on individuals and therefore the incidence
cannot be shifted and the tax burden in borne by those upon whom the tax is levied.
Indirect Tax: A tax levied on expenditure on goods and services. The incidence of such a tax
is usually shared.
Unit or specific tax: A tax levied on volume

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Harry Bindloss
Value Added Taxes: Tax levied on a percentage of the value or price of the good. Thus
as the price of the good rises the amount paid in tax will rise proportionately.
What are the effects of Tax?
1. Tax increases can cause inflation:
- Wage price spiral
- Can lead to Stagflation
2. Tax and marginal costs ­ If it is above marginal costs then there is no incentive to make
more
3. External costs ­ Can control negative externalities
4.…read more

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