Taxation

  • Created by: TeganLM
  • Created on: 13-04-19 15:47

Types of tax

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

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Principles of taxation

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

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Uses of tax

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'

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Taxes on income

  • 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
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Indirect Taxes

  • 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
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Taxes on capital and wealth

  • 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'
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