Taxation

The only difference between a tax man and a taxidermist is that the taxidermist
leaves the skin
Mark Twain
Benjamin Franklin wrote the wonderful and genuine remark: in this world nothing
can be said to be certain except death and taxes!. In modern times, the quotation was used by
Brad Pitt in the movie Meet Jo Black, also in a very meaningful and implicit way.
No matter the country you live in, even the last sum of money you have it in your
pocket has already been taxed or it is going to be taxed. When you buy the most insignificant
product or get your monthly salary, your money is always subject to taxation. Each amount of
money is taxed several times, because, no matter what you choose to do with your income,
taxes are everywhere.
1. Provide answers to the following questions:
What is the main purpose of taxes?
In what areas are exactly used the funds provided by taxation?
What would be the connection between taxation and the redistribution of wealth?
2. Which terms do the following sentences define?
The tax which is designed as a percentage of income constant over all income levels
a. indirect tax;
b. progressive tax; c. proportional tax
The tax where the percentage of return rises as the income rises
a. progressive tax; b. regressive tax;
c. capital gains tax
The tax where the percentage of return falls as income rises
a. sales tax;
b. regressive tax;
c. wealth tax
Taxes that are collected from the people or organizations on which they are imposed
a. indirect tax;
b. direct tax;
c. income tax

Taxes that are collected from someone other than the person responsible for paying the
taxes
a. indirect tax;
b. toll tax;
c. use tax
The taxes people pay on their wages and salaries
a. capital gains tax; b. income tax;
c. VAT
There are some countries which fund the systems providing income to retired persons
with specific taxes
a. retirement tax;
b. property tax;
c. personal property tax
The tax levied on the profit realized upon the sale of an asset
a. excise tax;
b. capital gains tax; c. use tax
It is a tax on the corporate earnings of a company. Earnings are generally considered
gross revenue less expenses
a. sales tax;
b. excise tax;
c. corporation tax

Taxes imposed on the manufacture and distribution of certain non-essential consumer

goods, such as fuel
a. excise tax;
b. property tax;
c. wealth tax
There are forms of excise levied when a commodity is sold to its final consumer
a. sales tax;
b. VAT;
c. toll tax
It is a tax used to pay for state bridge and road projects
a. VAT;
b. toll tax;
c. inheritance tax
There is a form of use tax that is collected for a particular need and to maintain roads
a. sales tax;
b. toll tax;
c. property tax
The last amount is paid by the eventual retail customer who cannot recover any of the
previously paid tax
a. VAT;
b. property tax;
c. indirect tax
It is usually levied on the value of property owned, typically real estate. They may be
charged on a recurrent basis or upon a certain event
a. inheritance tax; b. property tax;
c. personal property tax
Some believe that such taxes do not have any harmful effect on the economy and may
even be beneficial as they encourage consumer spending by the elderly. However,
some also believe them to discourage productivity and to disrupt the continuity of
family-owned businesses
a. inheritance tax; b. personal property tax;
c. wealth tax
Some countries governments will require declaration of the tax payers balance sheet
(assets and liabilities) and from that tax on net worth
a. personal property tax;
b. wealth tax;
c. property tax
In many countries there is a general tax levied periodically on residents who own
personal property within the jurisdiction.
a. personal property tax;
b. indirect tax;
c. wealth tax

Basic Issues on Taxation

The money taken from the public through taxation is always somewhat greater than
the amount, which can be used by the government. The difference is called the compliance
cost = labor cost + other expenses incurred due to tax laws.
Some economists, especially neo-classical economists, argue that all taxation distorts
the market and results in economic inefficiency. They have therefore tried to identify the kind
of tax system that would minimize this alteration. Since governments also resolve commercial
disputes, especially in countries with common law, this doctrine is often used to justify a sales
tax or value added tax. Libertarians argue that most or all forms of taxes are immoral due to
their involuntary nature.
There is also important to distinguish between marginal rate and average rate.
total _ tax _ paid
Average rate =
total _ amount _ the _ tax _ is _ paid _ on
Marginal rate = the rate paid on each currency earned

3. Imagine a country where the tax system is progressive; a taxpayer is taxed 10% from
0 5000 units, 15% from 5000 10.000 units, 20% above 10.000 units. How much will
pay a taxpayer with an income of 7.500 units?
Can you calculate his/her average rate as well as his/her marginal rate?
Economists always argue that taxes are unfair; but actually, taxes bring forward their
own equilibrium in the economy; a world without taxes would create a budget deficit and
would leave the producer, or the buyer, depending on the product traded, a too much surplus.
The ideal no taxed type of economy
P
Supply

P1`

Demand
Demand
Q`1

Figure 1
Figure 1 indicates a good which is not taxed. The ideal quantity Q1 is sold at price P1;
there is no government interference and the situation is perfectly regulated by the market,
which also establishes positive externalities.
The situation when taxes are used
P

Supply +
tax

Tax

P2

P1

Supply

Tax
Revenue
Demand
Demand
Q2

Q1

Figure 2
Figure 2. Whenever a producer wishes to produce an extra unit, s/he has to pay extra
taxes. When a marginal tax is levied on the goods produced, the market price for those goods
will rise to P2, and since fewer consumers wish to purchase the goods at the higher price, the
quantity produced falls to Q2. The government receives the amount of the tax for each unit
sold.

N. B. The revenue is higher to those producers of luxury goods (e.g. fuel); vice-versa, the
revenue is smaller to those producers of day-to-day goods.
4. In groups of two design two graphs for the same product; one to illustrate the first
example, the other to illustrate the second one; take into account a progressive tax
system.
5. Find words in the text that mean the following:
The total tax paid divided by the total amount the tax is paid on
The rate paid on the next currency of income earned
A cost incurred by legislation. Natural or legal persons keep detailed records of all
input tax and output tax to facilitate the completion of VAT returns
The side effect on an individual or entity due to the actions of another individual or
entity.
Financial charge imposed on an individual or a legal entity by a state
Task
Which kind of tax you find more advantageous for the Romanian current economic
situation, the progressive tax or the flat tax?