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Maktab Sains Paduka Seri Begawan Economics Form 5 Taxation Sultan Whi do we pay tax? 1, To raise money to pay for public expenditure. 2. Taxes can be used as prices, and reduce the consumption, of harmful goods such as alcohol and tobacco. 3. To help distribute income between different individuals and between different sectors of the economy, for example, In Bri in tax than poorer people. in, wealthy people tend to pay more 4, Taxes can be used to make foreign goods more expensive. By taxing foreign goods their prices increase and this makes consumers more likely to buy domestic products and services. 5. If people try to spend too much at once, this can cause prices to rise. Raising taxes can reduce the amount of money consumers have to spend. In this way taxes can be used to affect the economy. The different types of tax system There are basically three types of tax. A Government must decide whether they want a progressive, regressive or proportional tax system. Each type of system will affect people differently ‘A progressive tax system is when those with higher incomes pay a larger percentage of their in tax. This means better-off people pay a higher proportion of their incomes in taxes than poorer people. Governments use progressive taxation because they feel that people on higher incomes can afford to pay a larger proportion of their incomes in tax. ‘An example of a progressive tax system Annual income _ % Tax paid $ Tax paid $20,060 " 4 7 = 20 ____4000 o $50,000 40_ —20000 : $80,000 60 L_ 48000 | A regressive tax system works in exactly the opposite income increases, a smaller and smaller percentage is tal higher incomes pay a smaller percentage of their income i incomes do. ‘An example of a regressive tax syste _ way to progressive tax. As ken in taxation. People with in tax than people with lower ‘Annual income % Tax paid $Tax paid $20,000 | 50 10,000 $50,000 | 40 : 20,000 30,000 I 30 24,000 {A proportional tax is one where the proportion of income taken in tax is the same ‘whatever the level of income. For example, a tax of 20% on all incomes of all tax-players is an example of a proportional tax. Direct taxations are those taxes, which are placed on income and wealth the most Obvious example is personal income tax. These taxes are described as ‘direct’ because the person who is responsible for paying the tax to bear the burden of the tax. For examples: Income tax - imposing tax on income Corporation tax - imposing tax on the profit made by the company Petroleum revenue tax- imposing tax on the income of ol companies in the UIC Capital gains tax - when assets are sold at higher prices than those at which they were bought, the difference between the prices is described as capital gain. This capital gain is subject to tax. Le. share prices. Inheritance tax - tax is imposed on wealth, which is inherited. Stamp duties documents which transfer the ownership of property have to bear stamps, the value of which is related to the value of the properly Indirect taxations are those taxes, which are levied on spending. The best-known txample is VAT, but the excise duties on petrol, tobacco and alcoholic drinks are also important. These taxes are described as ‘indirect’ because the person responsible for paying the tax may pass on all or part of the burden of the tax in the form of higher prices. For examples: Value added tax (VAT) Itis levied at a rate of 15% on a wide range of goods and services, however some goods and services are not subject to. VAT. These include food (except meals out), children’s clothing and footwear, books,” newspaper, passenger transport, and prescribed medicines. Excise duties - tax charged on certain home-produced product and imported goods. The most important of these duties are those on petrol, alcoholic drinks, tobacco and betting and gaming Custom duties - these are tax charged on imports and are paid to the EEC Car tax - this is a special tax charged on new cars in addition to VAT.