MD Faisal Ahmed

Dept. of Electrical and Electronic Engineering

➢ Taxes are levied in almost every country of the world, primarily to raise revenue
for government expenditures, although they serve other purposes as well.
➢ In modern economies taxes are the most important source of governmental
revenue.
➢ Taxes differ from other sources of revenue in that they are compulsory levies and
are unrequited—i.e., they are generally not paid in exchange for some specific thing,
such as a particular public service, the sale of public property, or the issuance
of public debt.
➢ While taxes are presumably collected for the welfare of taxpayers as a whole, the
individual taxpayer’s liability is independent of any specific benefit received.
➢ There are, however, important exceptions: payroll taxes, for example, are
commonly levied on labour income in order to finance retirement benefits, medical
payments, and other social security programs—all of which are likely to benefit the
taxpayer.

Dept. of Electrical and Electronic Engineering

➢ Because of the likely link between taxes paid and benefits received, payroll taxes
are sometimes called “contributions” (as in the United States). Nevertheless, the
payments are commonly compulsory, and the link to benefits is sometimes quite
weak.
➢ Another example of a tax that is linked to benefits received, if only loosely, is the
use of taxes on motor fuels to finance the construction and maintenance of roads and
highways, whose services can be enjoyed only by consuming taxed motor fuels.

Dept. of Electrical and Electronic Engineering

Dept. of Electrical and Electronic Engineering
Dept. of Electrical and Electronic Engineering
 Direct taxes are one type of taxes an individual pays that are paid straight or
directly to the government, such as income tax, poll tax, land tax, and personal
{ property tax. Such direct taxes are computed based on the ability of the taxpayer to
pay, which means that the higher their capability of paying is, the higher their
taxes are.

Dept. of Electrical and Electronic Engineering

Examples of direct taxation include income tax, corporation tax (on companies’
profits), capital gains tax (a tax on the profits of sales of certain assets), wealth tax
(which is a tax on ownership of property or wealth) and a capital transfer tax (a tax
on gifts to replace death duties). Direct taxes are mainly collected by the central
government.
Advantages:
1. It is easy to determine the incidence of the tax – a person or institution who
actually pays and suffers the burden of tax.
2. Direct taxes tend to be progressive – people in the higher income group pay a
greater percentage than poorer people, e.g., income tax is graduated so that high
income earners pay a larger percentage; also a selective wealth tax would only
apply to those owning more than a certain level of wealth.
3. Direct taxes are easy to collect. Consider, for example, the PAYE system
which is used to collect income tax from most wage and salary earners.

Dept. of Electrical and Electronic Engineering

4. Direct taxes are important to the government’s economic policy. If the
government is fighting inflation it can impose, for example, high levels of income
tax to restrict consumer demand. If the government is concerned about
unemployment it can reduce the levels of income tax to increase consumer demand
and increase production.
Disadvantages:
1. Direct taxation may be a disincentive to hard work. High rates of income tax,
for example, may discourage people from working overtime or trying to gain
promotion at work. Some economists blame the ‘brain drain’ (i.e., the emigration
of highly qualified persons, such as scientists and doctors) on India’s high levels of
taxation.
2. Direct taxation discourage savings because, after paying tax, individuals and
companies have less income available to save. This means that investment, which
relies on the level of savings, is low and this could cause less production and
employment.
3. This type of taxation encourages tax evasion – to avoid paying so much tax.
4. There is no element of choice about paying the tax – it is unavoidable.
Dept. of Electrical and Electronic Engineering
Examples of indirect taxation include customs duties, motor vehicles tax, excise
duty, octroi and sales tax. Indirect taxes are collected both by the central and state
governments but mainly by the central government.
Advantages:
1. Indirect tax is fairly easy to collect.
2. It is easy to determine the incidence of an indirect tax.
3. The government can use it to discourage certain types of consumption. A high
rate of tax on tobacco can, for example, affect smoking habits.
4. Indirect taxation is a good way of raising revenue when levied on goods with an
inelastic demand, such as necessities.
5. Tourists do not pay income tax. But they spend money on goods and services.
This adds to the tax revenue of the government.
6. Consumers have a choice as to whether they pay the tax. They can avoid paying
the tax by not consuming the goods which are being taxed.

Dept. of Electrical and Electronic Engineering

7. Indirect taxes do not have a discentive effect on work.
Disadvantages:
1. Indirect taxes are regressive. A regressive tax is one which causes a poor person
to pay a higher percentage of his or her income as tax than a rich person. For
instance, the tax ingredient of the price of a new television set would be the same
for the poor and the rich person, but as a percentage of the poor person’s income,
it is far greater.
2. These taxes are not impartial. In recent years, certain groups of consumers have
complained that they are being heavily penalised by taxation, e.g., drinkers,
smokers and drivers.
3. Indirect taxes may contribute to inflation. The imposition of an indirect tax on an
item like petrol will increase its price. Since petrol is an essential input in a large
number of industries, this may set off an inflationary spiral. Moreover, trade
unions demand higher wages to maintain the real incomes of workers.

Dept. of Electrical and Electronic Engineering

Dept. of Electrical and Electronic Engineering
A specific tax is a fixed amount of tax placed on a particular good. It is also
referred to as a per-unit tax, and the tax will depend on the quantity sold (not
price).

Dept. of Electrical and Electronic Engineering

Examples of specific taxes
➢ A tax of £0.40 on 500 ml sugary drinks.
➢ A tax of £3.92 per 20 pack of cigarettes.
➢ A tax of £0.75 per litre of petrol.
A specific tax does not vary with the cost of the good – like for example an ad
valorem tax – which is a percentage of the price.
Diagram of specific tax
Placing a specific tax on a good shifts the supply curve to the left.

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The specific tax is P2-P0
➢ A specific tax is borne by both producers and consumers.
➢ Consumers see the price rise from P1 to P2.
➢ Producers receive P0 rather than P1.

Dept. of Electrical and Electronic Engineering

In this case, the specific tax is $6. The consumers see a rise in the price of $4, and
producers see a fall in the price they receive from $10 to $8.
Advantages of specific taxes
➢ Easy to understand
➢ A specific tax is effective at reducing demand. For example, cigarette tax has
steadily contributed to reducing cigarette consumption in past few decades.
➢ An ad Valorem tax places a proportionately higher tax on expensive goods.
This can encourage consumers to switch from expensive alcohol and expensive
cigarettes – to cheaper varieties. A specific tax increases the price of all equally and
has a bigger effect on reducing overall demand.
Disadvantages of specific taxes
➢ More likely to be regressive. The tax paid will be the same for different
income groups. So those on low-income will pay a higher percentage of income in
tax. An ad Valorem tax collects more tax from those consumers willing to purchase
more expensive varieties.

Dept. of Electrical and Electronic Engineering

The term income tax refers to a type of tax that governments impose on income
generated by businesses and individuals within their jurisdiction. By
law, taxpayers must file an income tax return annually to determine their tax
obligations.
Income taxes are a source of revenue for governments. They are used to fund
public services, pay government obligations, and provide goods for citizens.
How Income Tax Works?
Most countries employ a progressive income tax system in which higher-income
earners pay a higher tax rate compared to their lower-income counterparts. The
U.S. imposed the nation's first income tax in 1862 to help finance the Civil War.
After the war, the tax was repealed; it was reinstated during the early 20th century.
The Internal Revenue Service (IRS) collects taxes and enforces tax law in the
United States. The IRS employs a complex set of rules and regulations regarding
reportable and taxable income, deductions, credits, et al. The agency collects taxes
on all forms of income, such as wages, salaries, commissions, investments, and
business earnings.

Dept. of Electrical and Electronic Engineering

Individual Income Tax
Individual income tax is also referred to as personal income tax. This type of income
tax is levied on an individual's wages, salaries, and other types of income. This tax is
usually a tax the state imposes. Because of exemptions, deductions, and credits, most
individuals do not pay taxes on all of their income.
The IRS offers tax deductions for healthcare expenses, investments, and certain
education expenses. For example, if a taxpayer earns $100,000 in income and
qualifies for $20,000 in deductions, the taxable income reduces to $80,000 ($100,000
- $20,000 = $80,000).8
Tax credits exist to help reduce the taxpayer's tax obligation or amount owed. They
were created primarily for those in middle-income and low-income households. To
illustrate, if an individual owes $20,000 in taxes but qualifies for $4,500 in credits,
their tax obligation reduces to $15,500 ($20,000 - $4,500 = $15,500).8

Dept. of Electrical and Electronic Engineering

Business Income Taxes
Businesses also pay income taxes on their earnings; the IRS taxes income from
corporations, partnerships, self-employed contractors, and small
businesses. Depending on the business structure, either the corporation, its owners, or
shareholders report their business income and then deduct their operating and capital
expenses. Generally, the difference between their business income and their operating
and capital expenses is considered their taxable business income.

Dept. of Electrical and Electronic Engineering

Dept. of Electrical and Electronic Engineering
Dept. of Electrical and Electronic Engineering
Regressive tax: A tax is regressive if those with low incomes pay a larger
share of income in taxes than those with higher incomes. Almost any tax on
necessities, such as food purchased at a grocery store, is regressive because
lower income people must spend a larger share of their income on these
necessities. Oklahoma’s sales tax is one example.
Proportional tax: A tax is proportional if all taxpayers pay the same share of
income in taxes. No taxes are truly proportional. Property taxes often come
closest since there is typically a close relationship between a household’s
income and the value of the property in which they live. Corporate income
taxes often approach proportional because one rate applies to most corporate
income.

Dept. of Electrical and Electronic Engineering

Progressive tax: A progressive tax requires higher-income individuals to pay
a higher share of their income in taxes. The philosophy behind progressive
taxes is that higher income people can afford and should be expected to
provide a bigger share of public services than those who are less able to pay.
The federal income tax is the best example of a progressive tax; the Internal
Revenue Service reports that the top one percent of taxpayers by income paid
37 percent of federal income taxes in 2016.

Dept. of Electrical and Electronic Engineering

A good tax system should meet five basic conditions: fairness, adequacy,
simplicity, transparency, and administrative ease.
FASTA
Although opinions about what makes a good tax system will vary, there is general
consensus that these five basic conditions should be maximized to the greatest
extent possible.
1. Fairness, or equity, means that everybody should pay a fair share of taxes.
There are two important concepts of equity: horizontal equity and vertical equity.
Horizontal equity means that taxpayers in similar financial condition should pay
similar amounts in taxes.
Vertical equity is just as important, however. Vertical equity means that taxpayers
who are better off should pay at least the same proportion of income in taxes as
those who are less well off. Vertical equity involves classifying taxes
as regressive, proportional, or progressive.

Dept. of Electrical and Electronic Engineering

While no system of taxes is perfect, it is important to seek horizontal equity
because taxpayers must believe they are treated equally. It is just as important to
seek vertical equity so government does not become a burden to low-income
residents.

2. Adequacy means that taxes must provide enough revenue to meet the basic
needs of society. A tax system meets the test of adequacy if it provides enough
revenue to meet the demand for public services, if revenue growth each year is
enough to fund the growth in cost of services, and if there is enough economic
activity of the type being taxed so rates can be kept relatively low.

3. Simplicity means that taxpayers can avoid a maze of taxes, forms and filing
requirements. A simpler tax system helps taxpayers better understand the system
and reduces the costs of compliance.

Dept. of Electrical and Electronic Engineering

4. Transparency means that taxpayers and leaders can easily find information
about the tax system and how tax money is used. With a transparent tax system,
we know who is being taxed, how much they are paying, and what is being done
with the money. We also can find out who (in broad terms) pays the tax and who
benefits from tax exemptions, deductions, and credits.

5. Administrative ease means that the tax system is not too complicated or costly
for either taxpayers or tax collectors. Rules are well known and fairly simple;
forms are not too complicated; the state can tell if taxes are paid on time and
correctly, and the state can conduct audits in a fair and efficient manner. The cost
of collecting a tax should be very small in relation to the amount collected.

Dept. of Electrical and Electronic Engineering

Dept. of Electrical and Electronic Engineering
Dept. of Electrical and Electronic Engineering
Dept. of Electrical and Electronic Engineering