Project :Ecomomic





ADEEL RASOOL Department of public Administration


tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a tax payer(an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government .A payment exacted by legislative authority."[1] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name." The legal definition and the economic definition of taxes differ in that economists do not consider many transfers to governments to be taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by creating money (e.g., printing bills and minting coins), through voluntary gifts (e.g., contributions to public universities and museums),by imposing penalties (e.g., traffic fines), by borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received. In modern taxation systems, taxes are levied in money, but inkind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government

expenditure of taxes raised is often highly debated in politics andeconomics. Tax collection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in theUnited States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines orforfeiture) or criminal penalties (such as incarceration) [2] may be imposed on the non-paying entity or individual.


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1 Purposes and effects 1.1 The Four "R"s 1.2 Proportional, progressive, and regressive 1.3 Direct and indirect 1.4 Tax incidence 2 History 2.1 Taxation levels 2.2 Forms of taxation 3 Tax rates 4 Economics of taxation 4.1 Deadweight costs of taxation 4.2 Pigovian taxes 4.3 Transparency and simplicity 4.4 Tax incidence 4.5 Costs of compliance 5 Kinds of taxes 5.1 Ad valorem 5.2 Bank tax 5.3 Capital gains tax 5.4 Consumption tax 5.5 Corporate tax

8 Excises 5.12 Income tax 5.15 Poll tax 5.20 Toll 5.6 Currency transaction tax 5.19 Tariffs 5.11 Financial transaction tax 5.17 Social security tax 5.23 Wealth (net worth) tax 6 Views on taxation 6.18 Sales tax 5.9 Expatriation Tax 5.14 Inheritance tax 5.21 Transfer tax 5.22 Value Added Tax / Goods and Services Tax 5.4 Effects of income taxation on division of labor 7 By country or region 8 See also 9 Notes 10 External links .3 Views opposed to taxation 6.1 Ethical basis of taxation 6.13 Inflation tax 5.7 Environmental Tax 5.o o o o o o o o o o o o o o o o o o • o o o o • • • • 5.16 Property tax 5.10 Financial activities tax 5.2 Optimal taxation theory 6.

property taxes. some . Ad valorem An ad valorem tax is one where the tax base is the value of a good. In order to do this it has created a comprehensive categorisation of all taxes in all regimes which it covers. or property.Kinds of taxes The Organisation for Economic Co-operation and Development (OECD) publishes perhaps the most comprehensive analysis of worldwide tax systems. In many cases. then selling an asset for twice the price it was purchased for five years earlier represents no gain at all. the amount of a capital gain is treated as income and subject to the marginal rate of income tax. tariffs. capital gains may be to some extent illusory: if prices in general have doubled in five years. One of the earliest modern uses of the term "bank tax" occurred in the context of theFinancial crisis of 2007–2010. and value added taxes are different types of ad valorem tax. in an inflationary environment. However. Bank tax A bank tax ("bank levy") is a proposed tax on banks. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs). Capital gains tax A capital gains tax is the tax levied on the profit released upon the sale of a capital asset. Partly to compensate for such changes in the value of money over time. An alternative to ad valorem taxation is an excise tax. Sales taxes. where the tax base is the quantity of something. service. inheritance taxes. regardless of its price.

In Canada. If the book-tax difference is carried over more than a year. 50% of the gain is taxable income. Taxable profits are generally considered gross revenue less expenses and cost of property sold. If such a tax is levied on inherited property.jurisdictions. it can act as a de factoprobate or inheritance tax. give a favorable capital gains tax rate based on the length of holding. it is referred to as a temporary difference. Expenditures providing benefit over multiple periods are often deducted over the useful life of the resulting asset as depreciation or amortization. Consumption tax A consumption tax is a tax on non-investment spending. such as the United States. and can be implemented by means of a sales tax or by modifying an income tax to allow for unlimited deductions for investment or savings. Accounting rules about deductible expenses and tax rules about deductible expense may differ. giving rise to book-tax differences. Currency transaction tax . European jurisdictions have a similar rate reduction to nil on certain property transactions that qualify for the participation exemption. which then creates deferred tax assets and liabilities for the corporation. which are carried on the balance sheet. Corporate tax Corporate tax refers to a taxes levied by various jurisdictions on the capital or profits of companies or associations and often includes capital gains of a company. Short Term Capital Gains Tax (arising before 1 year) is 10% flat rate of the gains and Long Term Capital Gains Tax is nil for stocks & mutual fund units held 1 year or more and 20% for any other assets held 3 years or more. In India.

an excise is not a function of the value of the product being taxed. For example. greenhouse gas tax (Carbon tax).86¢/L) of gasoline. a blank media tax is a tax on recordable media such as CD-Rs. Excise taxes are based on the quantity. . in the United States. "sulfuric tax".4 cents per U. for instance. whose proceeds are typically allocated to copyright holders. For example. a person or corporation using CD-R's for data archival should not have to subsidize the producers of popular music. This term has been most commonly associated with the financial sector. There are several types of currency transaction taxes that have been proposed. of product purchased. Environmental Tax This includes natural resources consumption tax. a fuel excise (use tax) is often used to pay for public transportation. gallon. for example. Excises on particular commodities are frequently hypothecated. A special form of hypothecation arises where an excise is used to compensate a party to a transaction for alleged uncontrollable abuse. not the value. especially roads and bridges and for the protection of the environment. Critics charge that such taxes blindly tax those who make legitimate and illegitimate usages of the products.S. the most prominent being the Tobin tax and the Spahn tax. The stated purpose is to reduce the environmental impact by repricing. and others. the Federal government imposes an excise tax of 18. Most remain unimplemented concepts. as opposed to consumption taxes paid by consumers. while state governments levy an additional 8 to 28 cents per U.S. gallon (4.A currency transaction tax is a tax placed on a specific type of currency transaction. Excises Unlike an ad valorem.

and natural gas. A carbon tax is a tax on the consumption of carbon-based nonrenewable fuels. [21] Second.[22] The third. Expatriation Tax An Expatriation Tax is a tax on some who renounce their citizenship of some governments. vehicle excise duty is an annual tax on vehicle ownership. where any individual who has a net worth of $2 million or an average income-tax liability of $127.Excises (or exemptions from them) are also used to modify consumption patterns (social engineering). The object is to reduce the release of carbon into the atmosphere. the "Financial Stability Contribution" is a straight tax on a bank's gross profits—before deducting compensation. the IMF proposed three types of global taxes on banks:[20] First. Financial activities tax As a regulatory response and proposal to the financial crisis of 2007-2010. is afinancial transaction tax. a high excise is used to discourage alcohol consumption. this would eventually be refined so that riskier businesses paid more. Similar taxes may exist on tobacco. In the United Kingdom.. such as petrol. diesel-fuel. . the "Financial Activities Tax" aims directly at excess bank profit and pay. One example is the United States under theAmerican Jobs Creation Act. relative to other goods. but not ruled out as administratively difficult. This may be combined with hypothecation if the proceeds are then used to pay for the costs of treating illness caused by alcohol abuse. which was not endorsed by the IMF. It would initially be at a flat rate. and they may be collectively referred to as "sin taxes".000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to a higher tax rate. on April 16. 2010. jet fuels. etc. pornography. For example.

while corporate income taxes often tax net income (the difference between gross receipts. corporations. some of which remain unimplemented concepts. such as interest on bank savings. personal earnings may be strictly defined where labor. as opposed to consumption taxes paid by consumers. Some types of income.g. or investment is required . Various income tax systems exist. In some tax systems. Individual income taxes often tax the total income of the individual (with some deductions permitted).g. skill. Income taxation can be progressive. it is often called a corporate tax. The "tax net" refers to the types of payment that are taxed. Capital gains may be taxed when realized (e. This term has been most commonly associated with the financial sector. expenses. proportional. Income tax An income tax is a tax levied on the financial income of persons. and additional writeoffs). or corporation tax. The rates for different types of income may vary and some may not be taxed at all. and business income. capital gains. which included personal earnings (wages). corporate income tax. There are several types of financial transaction taxes. with varying degrees of tax incidence. when shares appreciate in value). or regressive. may be considered as personal earnings (similar to wages) or as a realized property gain (similar to selling shares). or other legal entities.Financial transaction tax A financial transaction tax is a tax placed on a specific type (or types) of financial transaction for a specific purpose (or purposes). Business income may only be taxed if it is significant or based on the manner in which it is paid. When the tax is levied on the income of companies. when shares are sold) or when incurred (e.

a loss on the stock market may be deducted against taxes paid on wages. Because the effects of monetary expansion or counterfeiting are never uniform over an entire . They may allow losses from one type of income to be counted against another.wages or pensions.g. gambling wins). and tax refundsfrom the government for those who have overpaid. they may be defined broadly to include windfalls (e. they are much less likely to receive the newly created monies before the market has adjusted with inflated prices. These corrections take one of two forms: payments to the government. Many economists[who?] hold that the inflation tax affects the lower and middle classes more than the rich. as they hold a larger fraction of their income in cash.[23] There are systemic effects of an expansionary monetary policy. in others. wages). and more often have fixed incomes. such that business losses can only be deducted against business tax by carrying forward the loss to later tax years. which are also definitively taxing. imposing a financial charge on some as a result of the policy.(e. Some argue that inflation is a regressive consumption tax. Personal income tax is often collected on a pay-as-you-earn basis.g. For example. Other tax systems may isolate the loss. with small corrections made soon after the end of the tax year. for taxpayers who have not paid enough during the tax year. Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. which acts as a hidden tax that subtracts value from those assets. Inflation tax An inflation tax is the economic disadvantage suffered by holders of cash and cash equivalents in one denomination of currency due to the effects of expansionary monetary policy.

In addition. One of the earliest taxes mentioned in the Bible of a half-shekel per annum from each adult Jew (Ex. However. creating the conditions common to a recession. This particular tax can be understood to be levied on future generations that would have benefited from economic growth. is a tax that levies a set amount per individual. Economic bubbles increase market instability. One example of a strong supporter of this tax was the former Federal Reserve chair Beardsley Ruml. and therefore increase investment risk. Poll tax A poll tax. this distinction does not apply in other jurisdictions. if using this terminology UK inheritance tax would be an estate tax. while the latter taxes the beneficiaries of the estate. or capitation tax. creating economic bubbles where the new monies are first introduced. It is an example of the concept offixed tax. Inheritance tax Inheritance tax. and death tax or duty are the names given to various taxes which arise on the death of an individual. estate tax. couples will choose to have . there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased. for example. In United States tax law. increased uncertainty benefits noone). Poll taxes are administratively cheap because they are easy to compute and collect and difficult to cheat. the policy influences capital transfers in the market. Economists have considered poll taxes economically efficient because people are presumed to be in fixed supply.economy. and it has a 100% transfer cost (so long as people are not acting against their interests. poll taxes are very unpopular because poorer people pay a higher proportion of their income than richer people. the supply of people is in fact not fixed over time: on average. 30:11-16) was a form of poll tax. However. also called a per capita tax.

improvements to land (immovable man-made things. and inheritance tax."[25] There are three species of property: land. buildings) and personal property (movable things). or the natural resources associated with specific areas of the Earth's surface: "lots" or "land parcels"). known colloquially as the 'Poll Tax riots'.g.[24] The introduction of a poll tax in medieval England was the primary cause of the 1381 Peasants' Revolt. Scotland was the first to be used to test the new poll tax in 1989 with England and Wales in 1990.. where the tax base is the estimated value of the property. which is imposed in many countries on the estates of the deceased. tax imposed by municipalities upon owners of property within their jurisdiction based on the value of such property. as it will not deter .e. with similar results. The two most common type of event driven property taxes are stamp duty. In contrast with a tax on real estate (land and buildings). Property tax can be defined as "generally. all natural resources. For a period of over 150 years from 1695 a window tax was levied in England.g. A common type of property tax is an annual charge on the ownership of real estate.fewer children if a poll tax is imposed. Property taxes are usually charged on a recurrent basis (e. Property tax A property tax is a tax put on property by reason of its ownership. charged upon change of ownership. A similar tax on hearths existed in France and elsewhere. with the result that one can still see listed buildings with windows bricked up in order to save their owners money. but more popularly referred to as the Poll Tax). a land value tax is levied only on the unimproved value of the land ("land" in this instance may mean either the economic term.. e. i. led to widespread refusal to pay and to incidents of civil unrest. Real estate or realty is the combination of land and improvements to land. yearly). The change from a progressive local taxation based on property values to a single-rate form of taxation regardless of ability to pay (the Community Charge. Proponents of land value tax argue that it is economically justified.

because the artworks have then become subject to personal property tax. a payroll tax that is collected from employers and employees in the United States to fund the country's Social Security system. Social security tax Some countries with social security systems. distort market mechanisms or otherwise create deadweight losses the way other taxes do. Examples of retirement taxes include the FICA tax. there is a general tax levied periodically on residents who own personal property(personalty) within the jurisdiction.production. In many jurisdictions (including many American states). and theNational Insurance Contributions (NICs) collected from employers and employees in . which provide income to retired workers. These often differ from comprehensive income taxes in that they are levied only on specific sources of income. tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display. When real estate is held by a higher government unit or some other entity not subject to taxation by the local government. Vehicle and boat registration fees are subsets of this kind of tax. If an artwork had to be sent to another state for some touch-ups. the taxing authority may receive a payment in lieu of taxes to compensate it for some or all of the foregone tax revenue. The tax is often designed with blanket coverage and large exceptions for things like food and clothing. fund those systems with specific dedicated taxes. Any otherwise non-exempt object can lose its exemption if regularly kept outside the household. generally wages and salary (in which case they are called payroll taxes). A further difference is that the total amount of the taxes paid by or on behalf of a worker is typically considered in the calculation of the retirement benefits to which that worker is entitled. Thus. it may have become subject to personal property tax in that state as well. Household goods are often exempt when kept or used within the household.

Florida. Retail organizations contend that such taxes discourage retail sales. Texas. so such exemptions make the tax more progressive. as those states do not levy a state income tax.S. Such states tend to have a moderate to large amount of tourism or interstate travel that occurs within their borders. so a flat-rate sales tax will tend to be regressive. as only those who spend money on non-exempt (i. utilities and other necessities from sales taxes. Additionally. This is the classic "You pay for what you spend" tax. Additional information can be obtained at the Federation of Tax Administratorswebsite. . Tennessee. New Hampshire and Tennessee levy state income taxes only on dividends and interest income. People with higher incomes spend a lower proportion of them. states that do not levy a state income tax are Alaska. whatever his or her income. The U. The benefit payments are similarly disproportionate. and Wyoming. In this way. since poor people spend a higher proportion of their incomes on these commodities. replacing a higher percentage of a lower-paid worker's pre-retirement income. Sales tax Sales taxes are levied when a commodity is sold to its final consumer. The question of whether they are generally progressive or regressive is a subject of much current debate.[28] Washington state. It is therefore common to exempt food. the state is able to reduce the tax burden on its citizens. states rely entirely on sales taxes for state revenue.S. A small number of U. but income over the cap is not taxed. only Alaska and New Hampshire do not levy a state sales tax. in the United States. Nevada. luxury) items pay the tax. These taxes are sometimes regressive in their immediate effect. pays at the same rate up to a specified cap.the United Kingdom to fund the country's national insurance system. allowing the state to benefit from taxes from people the state would otherwise not tax. For example. Of the above states. each worker. South Dakota.e.

The provinces of British Columbia. The provinces of Nova Scotia.Tax. there is a growing movement[29] for the replacement of all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The province of Quebec collects the Quebec Sales Tax [QST] which is based on the GST with certain differences. investment policy. and thus is a full VAT. In Canada. The classic ways of cheating a tariff are smuggling or declaring a false value of goods.In the United States. and Newfoundland & Labrador have harmonized their provincial sales taxes with the GST . Saskatchewan. Most businesses can claim back the GST. and possibly to impose protective tariffs on imports from outside the bloc. and the participating countries share the revenues from tariffs on goods entering the customs union. bridge. A customs union has a common external tariff. waterway or other transportation . HST and QST they pay. tariff and trade rules in modern times are usually set together because of their common impact on industrial policy. The tax proposal is named FairTax. A proportion of tariff revenues is often hypothecated to pay government to maintain a navy or border police. Tariffs discourage trade. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other. tunnel.Harmonized Sales Tax [HST]. Ontario and Prince Edward Island also have a provincial sales tax [PST]. and so effectively it is the final consumer who pays the tax. and agricultural policy. the federal sales tax is called the Goods and Services tax (GST) and now stands at 5%. Tariffs An import or export tariff (also called customs duty or impost) is a charge for the movement of goods through a political border. canal. Toll A toll is a tax[dubious – discuss] or fee charged to travel via a road. and they may be used by governments to protect domestic industries. Manitoba. New Brunswick.

a contract needed to have a stamp affixed to make it valid. or Turnover Tax in some countries. To give an example. and certain partnership transactions. or for distance on long routes.T). The charge for the stamp was either a fixed amount or a percentage of the value of the transaction. Transfer tax Historically. Single Business Tax. in many countries. The manufacturer will then transform the steel into a machine. Stamp duty has the effect of discouraging speculative purchases of assets by decreasing liquidity. In most countries the stamp has been abolished but stamp duty remains. also known as 'Goods and Services Tax' (G. Stamp duty is levied in the UK on the purchase of shares and securities. Shunpiking is the practice of finding another route to avoid payment of tolls. stamp duty reserve tax and stamp duty land tax.facilities. In the United States transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents. are respectively charged on transactions involving securities and land. road and tunnel projects. possibly graduated for vehicle type. applies the equivalent of a sales tax to every operation that creates value. The toll is likely to be a fixed charge. remitting that amount to the government. informal shunpiking by individuals escalated into a form of boycott by regular users. In some situations where tolls were increased or felt to be unreasonably high. Its modern derivatives. with the goal of applying the financial stress of lost toll revenue to the authority determining the levy. Historically tolls have been used to pay for public bridge. That manufacturer will pay the VAT on the purchase price. They have also been used in privately constructed transport links. the issue of bearer instruments. Value Added Tax / Goods and Services Tax A value added tax (VAT). selling the machine for .S. sheet steel is imported by a machine manufacturer.

as a percentage of the net worth. The effective rate is the total tax paid divided by the total amount the tax is paid on. but will remit to the government only the excess related to the "value added" (the price over the cost of the sheet steel). Tax rates Taxes are most often levied as a percentage. and 15% . An important distinction when talking about tax rates is to distinguish between the marginal rate and the effective (average) rate. or a percentage of the net worth exceeding a certain level.000 to $100. VAT is usually administrated by requiring the company to complete a VAT return.a higher price to a wholesale distributor. If input tax is greater than output tax the company can claim back money from the Local Tax Authority. giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax). but it is paid at differing points in the process. charging the retail distributor the VAT on the entire price to the retailer. For a VAT and sales tax of identical rates.000.000. An example is France's ISF. The manufacturer will collect the VAT on the higher price. the total tax paid is the same. The difference between output tax and input tax is payable to the Local Tax Authority. 10% from $50. and from that exact a tax on net worth (assets minus liabilities). Wealth (net worth) tax Some countries' governments will require declaration of the tax payers' balance sheet (assets and liabilities). The tax may be levied on "natural" or legal "persons". if income is taxed on a formula of 5% from $0 up to $50. but remitting only the amount related to the distribution mark-up to the government. For example. while the marginal rate is the rate paid on the next dollar of income earned. The wholesale distributor will then continue the process. called the tax rate. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT.

It has an element of certainity in it as the government is able to know who paid the tax and who evaded it.000) = 18.107 The "marginal rate" would be 15%.750 The "effective rate" would be 10. wealth tax. corporation taxes are the examples of direct taxes. Tax calculation (0.05*50. It does have a proper ratinale behind it. It is easier for people to evade taxes so less tranparency in the system. excise duty etc. 3.000) + (0. Rates of taxes are fixed arbitrarily by the government. They are quite unpopular among the people because a large part of their income goes in a single wave. 3.g.7%: 18. It dirctly affects the purchasing power of the people so it is an instrument in the hands of the government to reduce liquidity. .10*50. 4. Indirect tax: If impact of tax falls on one person and incidents on another.000 would pay a total of $18. 2. 2.15*75.000.000) + (0.750/175. Sales tax. 5. a taxpayer with income of $175. Makes people more responsible as they know that the public spending is because of the amount paid by them as tax.000 = 0. tax is called indirect tax e. No intermediary is there so there are less chances of corruption. income tax. Demerits: 1. Merits 1. Direct tax All taxes paid directly to state authorities by the taxpayer are direct taxes. Easy to collect as it is fixed and collected directly from source.750 in taxes. These types of tax are calculated on directly on the individual’s earnings or wealth.over $100.

Demerits: 1. 2. These are imposed on necessaries of life for which the demand is in-elastic. The real burden of the tax on the poor is greater than on the rich. 3. rich or poor pays the fax at the same rate. 4. 4. . 2. it is difficult to evade an indirect tax. Therefore. Uncertain: The state cannot correctly estimate as to how much money it will receive from a tax. Regressive: Indirect taxes are regressive. Elastic: Indirect taxes can be varied according to the needs of the state. A high paid staff of custom officials. No civic consciousness: No body feels that he is paying a tax as it is concealed is price. Further imposition of a tax will increase price of a commodity which will lead to fall in its demand. Also increase the cost of collection. Every consumer of a taxed commodity. indirect taxes are made more equitable by imposing on articles consumed by the rich. Therefore. these taxes are uneconomical.Merits : 1. Uneconomical: The taxed commodity passes through a number of middle men which add some thing to the tax. no civic consciousness can be developed in the tax-payer. Therefore. Equitable: The luxuries are generally taxed at a higher rate as compared to basic necessities. 3. appraisers raiding parties' etc. Therefore. No Evasion: The indirect tax is mixed up with the price of the commodity which is purchased by the people. Convenient: People pay these taxes when they buy a commodity and they buy a commodity at a time when they can afford.

(10) Restricted exemptions: tax exemptions must only be for specific purposes (such as to encourage investment) and for a limited period.taxation principles Definition Basic concepts by which a government is meant to be guided in designing and implementing an equitable taxation regime. (2) Broad Basing: taxes should be spread over as wide as possible section of the population. (7) Equity: taxes should equally burden all individuals or entities in similar economic circumstances. and should not be designed to interfere-with or influence individual decisions-making. These include: (1) Adequacy: taxes should be just-enough to generate revenue required for provision of essential public services. such as use of motor fuel tax for road maintenance. (6) Efficiency: tax collection efforts should not cost an inordinately high percentage of tax revenues. (4) Convenience: taxes should be enforced in a manner that facilitates voluntary compliance to the maximum extent possible. to minimize the individual tax burden. or sectors of economy. Taxation Structure It is worth knowing some terminology to make understanding easier. . (9) Predictability: collection of taxes should reinforce their inevitability and regularity. The marginal rate of tax (MRT) is the percentage taken in tax of the next (insert currency unit here) earned. (3) Compatibility: taxes should be coordinated to ensure tax neutrality and overall objectives of good governance. (8) Neutrality: taxes should not favor any one group or sector over another. (5) Earmarking: tax revenue from a specific source should be dedicated to a specific purpose only when there is a direct cost-andbenefit link between the tax source and the expenditure.

For example. and so pay proportionally a fewer taxes as a percentage of their income. this doesn't make your average rate of tax (ART) 10%. Regressive Taxation This is very rarely done intentionally by a government. and the second half at 15%. However.000. ART will be around 10-22%. high income individuals over more needy households. If the first half of your income is taxed at 5%. in the UK there are three rates of income tax . every next part of your income you earn will be taxed at 10%. The proportion of tax paid is always the same. Thus. However. For a low income earner. your MRT is 15%. Consider the following:  Say your income is §10. 22% 'standard tax'. and 40% high rate of tax. so if a low income earner is taxed at 20%. whereas a very high income earner will pay more like 30-40% ART. if your MRT is 10%.10% 'starting tax'. so is a higher income earner. if MRT and ART do not equal zero!). Very high income earners may spend a lower proportion of their income on goods and services. your ART is [(0.So. However.15 x 5000)]/10000 = 10% Proportional Taxation Proportional taxation means that MRT = ART. higher income earners pay a greater proportion of their income in tax than low earners. as it would be extremely unpopular and would be seen as supporting wealthy. Progressive Taxation Progressive taxation means that MRT > ART (if you are pedantic. indirect taxation could be said to partly support this. though in absolute terms it goes up the higher your income.05 x 5000) + (0. Taxation has four main purposes or effects: .

Studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance.(a) Revenue. roads. for example. Redistribution: A second is redistribution. to discourage smoking. and citizens demand accountability from their rulers as the other part of this bargain. whileindirect taxation tends to have smaller effects. Tax incidence . schools and hospitals. (c)Repricing. and a carbon tax discourages use of carbon-based fuels. Repricing. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens. this means transferring wealth from the richer sections of society to poorer sections. Representation A fourth. A third purpose of taxation is repricing. Normally. (b) Redistribution. Taxes are levied to address externalities: tobacco is taxed. consequential effect of taxation in its historical setting has been representation. (d)Representation Revenue: The main purpose is revenue: taxes raise money to spend on armies. and on more indirect government functions like market regulation or legal systems.

70 so that. taxes are imposed on business (such as corporate taxes or portions of payroll taxes). who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes becomeembedded into production costs. To illustrate this relationship. the buyer pays a total of $1. by law. In this example. or $0. For example. If the elasticity of demand is low. Therefore in order to stabilise sales. landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence). If the product has an elastic demand.20 more than he did before the $0. suppose the market price of a product is $1.50 tax (in .20.50 tax was imposed. more of the tax will be paid by the supplier.00. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand). a greater portion of the tax will be absorbed by the seller. the seller might drop the price of the product to $0. This is because goods with elastic demand cause a large decline in quantity demanded for a small increase in price. is to be collected from the seller. a tax can be absorbed by the seller (in the form of lower pre-tax prices).Diagram illustrating taxes effect Law establishes from whom a tax is collected. And contrariwise for the cases where those elasticities are high. the tax burden flows back to thefactors of production depending on the elasticities thereof. after adding in the tax. capital investors (in the form of loss to shareholders).50 tax is imposed on the product that. the buyer has paid $0.20 of the $0. If the elasticity of supply is low. If the seller is a competitive firm. this includes workers (in the form of lower wages). and that a $0. the seller absorbs more of the additional tax burden. However. more will be paid by the customer. In many countries. or by the buyer (in the form of higher post-tax prices).

taxes were clamped on . In some circumstances. or cabinets to reduce consumption of imported glass and hardware.  Danegeld .medieval land tax originally raised to pay off raiding Danes and later used to fund military expenditures. paid to the Church (and thus too specific to be a tax in strict technical terms). This should not be confused with the modern practice of the same name which is normally voluntary. Aids . Some principalities taxed windows.30 (in the form of a lower pre-tax price).    Carucage .a tax-like payment (one tenth of one's earnings or agricultural produce). taxes are also used to enforce public policy like congestion charge (to cut road traffic and encourage public transport) in London. Forms of taxation In monetary economies prior to fiat banking.the principle of assigning the responsibility for tax revenue collection to private citizens or groups. Armoires. a critical form of taxation was seigniorage.the form of a post-tax price) and the seller has paid the remaining $0.paid in lieu of military service. and wardrobes were employed to evade taxes on doors and cabinets. Other obsolete forms of taxation include: Scutage .tax which replaced the danegeld in England.During feudal times a feudal aid was a type of tax or due paid by a vassal to his lord. but functioning as a tax in practice    Tallage . doors. In Tsarist Russia.a tax on feudal dependents Tithe . Tax Farming . hutches. strictly speaking a commutation of a non-tax obligation rather than a tax as such. the tax on the creation of money.

In a competitive market. one of the most complicated taxation-systems worldwide is in Germany. spending €3. . and is known as the 'deadweight cost of taxation'. Three quarters of the world's taxation-literature refers to the German system[citation needed]. while those of developing economies of India. Today. The side-effects of taxation and theories about how best to tax are an important subject in microeconomics. Economics of taxation In economic terms. the price received by the seller is less than the cost to the buyer. There are 118 laws. This means that fewer trades occur and that the individuals or businesses involved gain less from participating in the market.beards. and others rely more on indirect taxes. Africa. Today. the price of a particular economic good adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur. This destroys value. Deadweight costs of taxation Taxes generally reduce economic efficiency by introducing a deadweight loss. Economic theories of taxation approach the question of how to minimize the loss of economic welfare through taxation and also discuss how a nation can perform redistribution of wealth in the most efficient manner. governments of advanced economies of EU. 185 forms. Taxation is almost never a simple transfer of wealth. and 96.000 regulations. After introducing a tax. and others rely more on direct taxes.7 billion to collect the income tax. taxation transfers wealth from households or businesses to the government of a nation. North America.

after economist Arthur Pigou. Most taxes—including income tax and sales tax—can have significant deadweight costs.The deadweight cost is dependent on the elasticity of supply and demand for a good. meaning that it has negative effects not felt by the consumer. Pigovian taxes The existence of a tax can increase economic efficiency in some cases.[17]where the tax is on a good in completely inelastic supply. This type of tax is called a Pigovian tax. Transparency and simplicity . Such taxes include the land value tax. the government can increase overall welfare as well as raising revenue. The only way to avoid deadweight costs in an economy which is generally competitive is to refrain from taxes which change economic incentives. Possible Pigovian taxes include those on polluting fuels (like petrol). then a free market will trade too much of that good. taxes on goods which incur public healthcare costs (such as alcohol ortobacco). and charges for existing 'free' public goods (like congestion charging) are another possibility. If there is a negative externality associated with a good. By taxing the good. a lump sum tax such as a poll tax (head tax) which is paid by all adults regardless of their choices. Arguably a windfall profits tax which is entirely unanticipated can also fall into this category.

Tax incidence Economic theory suggests that the economic effect of tax does not necessarily fall at the point where it is legally levied. the more opportunities for legal tax avoidance and illegal tax evasion. The more details of tax policythere are. More complex tax systems tend to have higher costs of compliance. or tax elimination. payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. FairTax). . for instance. for example. no tax would be payable. but if the same goods were shipped from one branch of a corporation to another. a tax on employment paid by employers will impact on the employee.the part of the transaction which is affected least by a change in price. some of the costs. This fact can be used as the basis for practical or moral arguments in favor of tax simplification (see. For instance. are borne by businesses and by private individuals. a sale from one company to another might be liable for sales tax. Costs of compliance Although governments must spend money on tax collection activities. These are collectively called costs of compliance. The greatest share of the tax burden tends to fall on the most inelastic factor involved . for instance. particularly for keeping records and filling out forms.Perverse incentives also occur because of non-taxable 'hidden' transactions. but involve additional deadweight costs: for instance. for instance. economists often suggest simple and transparent tax structures which avoid providing loopholes.Another concern is that the complicated tax codes of developed economies offer perverse economic incentives. To address these issues. Sales tax. these not only result in lost revenue. So. a tax on wages in a town will (at least in the long run) affect property-owners in that area. can be replaced with a value added tax which disregards intermediate transactions. at least in the long run.

paraphrasing various statements by Oliver Wendell taxation can be used to reduce economic inequality in a society. The conservative position is encapsulated in perhaps the most famous adage of public finance. as well as the provision of a . society as a whole decides how the tax system should be organized.[31] It can also be argued that in a democracy. For traditional conservatives. [33] Conservatives advocate the "fundamental conservative premise that no one should be excused from paying for government. Additionally. because the government is the party performing the act of imposing taxes. lest they come to believe that government is costless to them with the certain consequence that they will demand more government 'services'. Jr. "An old tax is a good tax". the payment of taxation is justified as part of the general obligations of citizens to obey the law and support established institutions.Views on taxation Ethical basis of taxation According to most political philosophies.[34] Social democrats generally favor higher levels of taxation to fund public provision of a wide range of services such as universalhealth care and education. taxes are justified as they fund activities that are necessary and beneficial to society. According to this view.".[30] A common presentation of this view. taxation in modern nation-states benefit the majority of the population and social development. [32] The American Revolution's "No taxation without representation" slogan implied this view. is "Taxes are the price of civilization".

or that separate taxation of business is justified on the grounds that commercial activity necessarily involves use of publicly established and maintained economic infrastructure. The view that democracy legitimizes taxation is rejected by those who argue that all forms of government. Voluntaryists. such as . Defenders of business taxation argue that it is an efficient method of taxing income that ultimately flows to individuals. or tyranny. Views opposed to taxation Because payment of tax is compulsory and enforced by the legal system. etc.range of welfare benefits. Libertarian opponents of taxation claim that governmental protection. and that businesses are in effect charged for this use. and libertarians see taxation as government aggression (see zero aggression principle).) is unearned income. the capacity to tax income from capital is a central element of the social democratic case for a mixed economy as against Marxist arguments for comprehensive public ownership of capital. Individualist anarchists. are fundamentally oppressive. accusing the government of levying taxes via force and coercive means. due tomethodological individualism. including laws chosen by democratic means. and the social contract. objectivists. They advocate a high tax (the "Single Tax") on land and other natural resources to return this unearned income to the state. such as income tax. and belongs to the community rather than any individual. "society as a whole" should not make such decisions. is often justified on grounds including territorial sovereignty.[35] As argued by Tony Crosland and others. anarcho-capitalists. mineral extraction. but no other taxes. some political philosophies view taxation as theft (or as a violation of property rights). According to Ludwig von Mises.[36] Georgist economists argue that all of the economic rent collected from natural resources (land. . Many libertarians recommend a minimal level of taxation in order to maximize the protection ofliberty. fishing quotas. Compulsory taxation of individuals.

Williams. that's what a thief does. The difference between government and thievery is mostly a matter of legality. you would do job A and somebody else would do job B. but rarely points to the harm caused by forced removal of possessions. Under perfect division of labor. And suppose that because of your unique abilities. Walter E. taxation played a minor role. stated "Government income redistribution programs produce the same result as theft. In socialist economies such as that of China. not taxation itself. then it may be cheaper to perform the services oneself than to pay someone else — even considering losses in economic efficiency. professor of economics at George Mason University. most arguments about taxation revolve around the degree and method of taxation and associated government spending. But job B is the one that you need done right now. since most government income was derived from the ownership of enterprises. Effects of income taxation on division of labor If a tax is paid on outsourced services that is not also charged on services performed for oneself. arbitration agencies or voluntary contributions. . schools and so on). Karl Marx assumed that taxation would be unnecessary after the advent of communism and looked forward to the "withering away of the state". and it was argued by some that taxation was not necessary. Taxation has also been opposed by communists and socialists. he redistributes income. suppose jobs A and B are both valued at $1 on the market.police and defense forces might be replaced by market alternatives such as private defense agencies. you can do job A twice over (100% extra output) in the same effort as it would take you to do job B. [41] While the morality of taxation is sometimes questioned. In fact.[42][43] For example. Your unique abilities would always be rewarded." Discourse surrounding taxation generally places an emphasis on the intended benefits (healthcare.

conflicts in choosing methods and forms of taxation occur. You're left with one unit of job B. The other half of the work you do for somebody who does job B twice over but he has to sell off half to pay his tax bill. Contents • • • 1 Principles of a Good Tax System 2 Direct and Indirect Taxation 3 Taxation Structure . and different definitions and structures to taxation which are outlined below.[4 (11) Simplicity: tax assessment and determination should be easy to understand by an average taxpayer. anything less than 400% productivity will cause the division of labor to fail. selling half your work on the market for cash just to pay your tax bill. but only if you were 400% as productive doing job A! In this case of 50% tax on barter income.Income taxation has the worst effect on division of labor in the form of barter. Now suppose you could amazingly do job A four times over. pitting priorities such as reducing iniquity of income against maximising incentive for economic growth. Even a mere 30% tax rate can negate the advantage of a 100% productivity gain. Also. There are many methods by which tax revenue can be gained. Suppose that the person doing job B is actually interested in having job A done for him. depending on the situation a 50% tax rate can cause the division of labor to fail even where productivity gains of up to 300% would have resulted. In summary. Principles of Economics/Taxation Taxation is the method by which a government gains revenue to spend on things like public services and welfare benefits.

Taxation should be governed by people's ability to pay. without burdening the tax payer too much. This is to minimise discontent. Equitable .Those that use a publicly provided service (which is funding primarily through taxation) should pay for it! However. or disincentivising investment or work 2.2 Progressive Taxation 3.The system should not be incomprehensible to the layperson.o o o 3.3 Regressive Taxation Principles of a Good Tax System 1. Understandable . .A tax system should raise enough revenue such that government projects can be adequately sponsored. nor should it appear unjust or unneedfully complex. Efficient . wealthier individuals or firms with greater incomes should pay more in tax while those with lower incomes should pay comparatively less.1 Proportional Taxation 3. 4. Benefit Principle . and costs. conflicts in principle may and often do arise between this and principle 3. 3. that is.

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