Professional Documents
Culture Documents
5.2 Taxation
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Aims
Different types of taxes ( direct, indirect,
progressive, regressive, proportional)
- Impact of this taxes
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Quick Google
Search on the top 10 public expenditure
countries in the world
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Reasons of taxes
Redistribution of income
Limit output of demerit goods
Protect domestic firms
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Financing public expenditure
As public expenditure rises a government must raise more
revenue to pay for it. This can be done in these ways:
Tax burden:
total tax revenue as a proportion of
the national income of a country
http://www.investopedia.com/terms/t
/tax-to-gdp-ratio.asp
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How taxes are used
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Direct tax
Paid from income, wealth, profit
Eg; salaries, company profit
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Indirect tax
Imposed on expenditure on goods and
services
Goods and services tax (GST)
Value added tax (VAT) - based on a
taxpayer's consumption of goods rather than
his income.
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Progressive tax
Based on income level
Higher incomes pay high tax
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Regressive Tax
takes a larger percentage of income from
low-income earners than from high-income
earners
A regressive tax affects people with low
incomes more severely than people with high
incomes.
http://www.investopedia.com/terms/r/regressi
vetax.asp
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Proportional tax
income tax system where the same
percentage of tax is levied from all
taxpayers, regardless of their income
Also known as flat tax
For example, if the rate is set at 20%, a
taxpayer earning $10,000 pays $2,000 and a
taxpayer earning $50,000 pays $10,000.
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Impact of tax
Price and quantity (sales tax will shift the
supply curve of product to left; $ increase
so quantity reduced)
Economic growth (tax reduces incentives to
work; however it is needed to fund
government spending)
Inflation (fiscal policy)
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Business location (corporation tax are high
in few countries)
Social behaviour (reduce consumption on
demerit goods)
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Direct taxes
Personal income tax
Corporation (or profits) tax
Capital gains tax
Wealth (e.g. inheritance and property) tax
Advantages of direct taxes Disadvantages of direct tax
They are a major source of tax revenue Income taxes can reduce work incentives
Many are progressive and help to reduce Taxes on profits can reduce profit available
inequalities in incomes after tax to entrepreneurs to re-invest in their
They take account of peoples ability to businesses
pay High tax rates can cause tax evasion
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Indirect taxes
Value added tax (VAT)
Excise duties
Import tariffs
User charges
Advantages of indirect taxes Disadvantages of indirect tax
They are cost effective to collect The cost of collecting taxes falls to
A wide tax base. Anyone who buys goods businesses
and services will pay some indirect taxes They are regressive
They can be used to discourage Tax revenues are less certain because
consumption and production of harmful they depend on spending patterns
products They add to price inflation
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Balancing the budget
In the Budget a government sets out its plans for public spending and raising
tax revenues for the financial year ahead
Budget deficit Budget surplus
An expansionary fiscal policy will increase a budget deficit or reduce a budget surplus
A contractionary fiscal policy will reduce a budget deficit or increase a budget surplus
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National debt
A government must borrow if public expenditure exceeds public revenue
The total amount of money borrowed by the public sector of a country over time
that has yet to be repaid is the public sector or national debt
Taxes will have to increase or other public spending cut to pay rising interest
charges if the national debt expands at a faster rate than national income
US national debt
US debt as a proportion of US GDP
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