Taxation

Progressive: proportion of income paid in tax rises as income rises

Regressive: proportion of income paid in tax falls as income rises

Proportional: proportion of income paid in tax is equal across income levels

Direct: taxes paid directly to the government by the individual taxpayer e.g income tax

Indirect: supplier can potentially pass on tax burden to the final consumer

Economy: should be cheap to collect

Equity: based on taxpayer's ability to pay

Efficiency: should achieve its desired consequences with minimum side effects

Flexibility: easy to change to meet new circumstances

Convenience: convenient to pay

Certainty: taxpayers should be reasonably certain of the amount of tax they will be required to pay

Taxes (and subsidies) can be used to improve resource allocation and allocative efficiency (where price=marginal cost)

Can also be used to reduce inequality between the rich and poor 

However: conflict between efficiency and equity

equity: progressive taxation reduces the incentive for people to work hard and breeds a 'dependency culture'

free-market economists argue that cutting income tax and benefits would alter the work/leisure choice in favour of supplying labour and lead to 'trickle-down growth'

• e.g. corporation tax, income tax and national insurance contributions
• direct taxes
• mostly: cheap to collect, progressive
• however: can be easy to avoid and evade e.g. 'cash in hand' workers
• arguably: high taxes create avoidance/evasion work for financial advisors: doesn't provide net benefit to the UK economy
• uninented consequences e.g. its role as a disincentive
• main source of government revenue in the UK

• V.A.T., excise duties, sin taxes etc.
• advantages of excise duties: can encourage consumers to switch expenditure away from demerit goods
• free-market economists: believe that high levels of indirect tax is unecessary intervention
• V.A.T. has little effect on expenditure patterns (mostly the same rate across goods/services)
• taxing many goods at the same rate- increases tax base but reduces effectiveness in influencing spending patterns

• Direct taxes e.g. council tax, inheritance tax
• some can be avoided at relatively low cost: others it is less easy
• little change in council tax in the UK: last time council tax was changed was in 1998 when house prices were significantly lower than they are today
• relatively low in the UK- 1980s attempts to attract high earners for 'trickle-down growth'