Unit 8

TAXATION

Overview

This unit provides the general knowledge of taxation as the first simple step for
students to build up basic terms before they dive into taxation theories and practices.
In particular, this lesson provides key definitions and popular types of taxes as well as
the roles of the taxation system.

Learning objectives
After this unit, students should be able to:
>> Define terms related to taxes
>> Describe the major types of taxes
>> Know about the roles of tax and tax planning

Think and discuss

1. What is taxation?
2. How many types of taxation can you list?

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 1. SPECIAL TERMS

Match the words or expressions in column A with their definition in column

B. You can look it up for more detailed explanations in the specialist dictionary.

Column A Column B
A. a tax on money received from salary,
1. tax
investments, rent
B. a consumption tax that is levied at each
2. capital gains tax
stage of production based on the value-added
to the product at that stage
C. a tax that takes a larger proportion from low-
3. personal income tax income people than from high-income people
D. a tax that takes a larger proportion from high-
4. corporate income tax income earners than it does from low-income
individuals
E. taxes imposed on specific products such as
5. excise tax petrol, tobacco, alcohol
F. a tax imposed on those who inherit assets
6. value-added tax
from a deceased person
G. a tax on a company’s profit
7. inheritance tax
8. indirect tax H. a type of tax levied on capital gains incurred by
individuals and corporations
I. a tax that is not directly imposed on income
9. direct tax
and it is not paid by the taxpayer direct to the
government but collected by suppliers,
shopkeepers, stores, ect
J. a tax that is levied on people’s incomes or
10. progressive tax
companies’ profit and it is paid by the taxpayer
direct to the government
K. the practice of reducing tax liabilities to a
11. regressive tax
minimum by legal means
12. tax avoidance L. the practice of making false tax declarations
(which is of course illegal)
13. tax evasion M. A part of income which is legally stipulated and
compulsorily paid by individuals and companies to
the government to finance the public expenditures
N. a way of reducing or postponing taxation
14. tax haven
15. tax shelter O. a financial center offering low taxes to non-
residents, in which multinational companies are
encouraged to set up offices
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2. READING

READING 1

Reading text 1: An introduction to taxation and do exercises 2.1, 2.2 below

AN INTRODUCTION TO TAXATION

Benjamin Franklin wrote that “In this world nothing can be said to be certain except
death and taxes”. Unhappily, governments are often responsible for the former, and they
are virtually always the source of the latter. Government finance most of their expenditure
by taxation. If they spend more than they levy or charge in taxes, they have to borrow
money. Taxation is the system by which a government takes money from people and
spends it on things such as education, health, and defence.
Direct taxes are collected by the government from the income of individuals and
businesses. Individuals pay income tax on their wages or salaries and most other money
they receive. Most countries have a capital gains tax on profits made from the sale of assets
such as stocks or shares. This is usually imposed or levied at a much lower rate than income
tax. A capital transfer tax (commonly called death duty in Britain) is usually imposed on
inherited money or property. Other names for this tax are inheritance tax or estate tax.
Companies pay corporation tax on their profits. Business profits are generally taxed twice
because after the company pays tax on its profits, the shareholders pay income tax on any
dividends received from these profits. Companies and their employees also have to pay
taxes (called national insurance in Britain) which the government uses to finance social
security spending - unemployment pay, sick pay, etc.
Indirect taxes are levied on the production or sale of goods and services. They are
included in the price paid by the final purchaser. In most European countries, companies
pay VAT or value-added tax, which is levied at each stage of production, based on the
value-added to the product at that stage. The whole amount is added to the final price paid
by the consumer. In Canada, Australia, New Zealand and Singapore, this tax is called goods
and services tax or GST. In the USA, there are sales taxes, collected by retailers, levied on
the retail price of goods. Governments also levy excise taxes or excise duties - additional
sales taxes on commodities like tobacco products, alcoholic drinks and petrol. Special
taxes, called tariffs, are often charged on goods imported from abroad. Income tax for
individuals is usually progressive: people with higher incomes pay a higher rate of tax (and
therefore a higher percentage of their income) than people with lower incomes. Indirect
taxes such as sales tax and VAT are called proportional taxes, imposed at a fixed rate. But
indirect taxes are actually regressive: people with a low income pay a proportionally greater
part of their income than people with a high income.

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 The primary function of taxation is, of course, to raise revenue to finance
government expenditure, but taxes can also have other purposes. Indirect excise duties, for
example, can be designed to dissuade people from smoking, drinking alcohol, and so on.
Governments can also encourage capital investment by permitting various methods of
accelerated depreciation accounting that allow companies to deduct more of the cost of
investments from their profits, consequently reducing their tax bills.
There is always a lot of debate as to the fairness of tax systems. Business profits,
for example, are generally taxed twice: companies pay tax on their profits (corporation tax
in Britain, income tax in the USA), and shareholders pay income tax on dividends.
Income taxes in most countries are progressive, and are one of the ways in which
governments can redistribute wealth. The problem with progressive taxes is that the
marginal rate - the tax people pay on any additional income - is always high, which is
generally a disincentive to both working and investing. On the other hand, most sales taxes
are slightly regressive, because poorer people need to spend a larger proportion of their
income on consumption than the rich.
The higher the tax rates, the more people are tempted to cheat, but there is a
substantial “black” or “underground” economy nearly everywhere. In Italy, for example,
self-employed people - whose income is more difficult to control than that of company
employees - account for more than half of the national income. Lots of people also have
undeclared, part-time evening jobs (some people call this ‘moonlighting') with small and
medium-sized family firms, on which no one pays any tax or national insurance. In 1986,
the Director of the Italian National Institute of Statistics calculated the size of the
underground economy, added 16.7% to Italy's gross national product (GNP) figure, andthen
claimed that Italy had overtaken Britain to become the world's fifth largest economy.
To reduce income tax liability, some employers give highly-paid employees lots of
perks or benefits instead of taxable money, such as company cars, free health insurance,
and subsidized lunches. Legal ways of avoiding tax, such as this, are known as loopholes
in tax laws. Life insurance policies, pension plans, and other investments by which
individuals can postpone the payment of tax are known as tax shelters. Donations to
charities that can be subtracted from the income on which tax is calculated are described
as tax-deductible.
Companies have a variety of ways of avoiding tax on profits. They can bring
forward capital expenditure (on new factories, machines, and so on) so that at the end of
the year all the profits have been used up; this is known as “making a tax loss”.
Multinational companies often set up their head offices in countries such as Liechtenstein,
Monaco, the Cayman Islands, and the Bahamas, where taxes are low; such countries are
known as tax havens. Criminal organizations, meanwhile, tend to pass money through a
series of companies in very complicated transactions in order to disguise its origin from
tax inspectors and the police; this is known as “laundering money”. Using illegal methods
ra tin

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- such as not declaring your income, or reporting it inaccurately is called tax evasion, and
leads to big penalties.
(Source: Ian Mackenzie, 2003, Financial English, Boston, Thomson & Heinle)

2.1 Reading the text carefully and answer the following questions

1. What is taxation?
2. What is the difference between an income tax and a capital gains tax?
3. What tax do companies pay?
4. What are indirect taxes levied on?
5. What is VAT based on?
6. What is the basic function of taxation?
7. How can government encourage capital investment?
8. What do some employers do to reduce income tax liability?
9. What are some examples of tax shelters?
10. How can companies avoid tax on profits?

2.2 According to text 1 which of the following sentences are true (T) or false (F)

1. Capital gains are generally taxed at a higher rate than income.

2. The same amount of money can be taxed more than once.
3. Sales taxes can be both proportional and progressive at the same time.
4. Excise duties are extra sales taxes on selected products.
5. Taxes can be designed both to discourage and encourage spending.
6. Progressive taxes may discourage people from working extra hours.
7. Employees will generally pay less tax if their employer reduces their
salary a little and provides them with a car.
8. “Loopholes” are a common form of tax evasion.
9. If you pay a lot of your income into a pension fund or a life insurance
policy, you never have to pay tax on it.
10. Many international companies have their registered headquarters in
small countries where they do only a small proportion of their business.

READING 2

Reading text 2: What is tax planning? and do exercise 2.3 below

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 WHAT IS TAX PLANNING?
Tax planning is a broad term that is used to describe the processes utilized by
individuals and businesses to pay the taxes due to local, state, and federal tax agencies. The
process includes such elements as managing tax implications, understanding what types of
expenses are tax deductible under current regulations, and in general, planning for taxes in
a manner that ensures the amount of tax due will be paid in a timely manner.
One of the main focuses of tax planning is to apply current tax laws to the revenue
that is received during a given tax period. The revenue may come from any revenue
producing mechanism that is currently in operation for the entity concerned. For
individuals, this can mean income sources such as interest accrued on bank accounts,
salaries, wages, tips, bonuses, investment profits, and other sources of income as currently
defined by law. Businesses will consider revenue generated from sales to customers, stock
and bond issues, interest-bearing bank accounts, and any other income source that is
currently considered taxable by the appropriate tax agencies.
In many cases, a primary goal of tax planning is to apply current laws in a manner
that allows the individual or business to reduce the amount of taxable income for the period.
Thus, planning for taxes involves knowing which types of income currently qualify as
exempt from taxation. The process also involves understanding what types of expenses
may be legitimately considered as deductions, and what circumstances have to exist
for the deduction to be claimed on the tax return.
There are three common approaches to tax planning for the purposes of minimizing
the tax burden. The first is to reduce the adjusted gross income for the tax period. This is
where understanding current tax laws as they relate to allowances and exemptions come
into play.
A second approach to tax planning is to increase the number of tax deductions.
Again, this means knowing current laws and applying them when appropriate to all usual
and normal expenses associated with the household or business. Since these can change
from one annual period to the next, it is always a good idea to check current regulations.
One final approach that may be applicable to effective tax planning has to do with
the use of tax credits. This can include credits that relate to retirement savings plans, college
expenses, adopting children, and several other credits. One common example of a tax credit
is the earned income credit, which is intended to relieve the tax burden for people who earn
less than a certain amount in a given calendar year.

2.3 Choose the best answer given to the question

1. What is not considered as revenue generated by an individual?

A. investment profits
B. salaries

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 C. interest-bearing bank accounts
D. interest accrued on bank accounts
2. What does planning for taxes involve?
A. ensuring the amount of tax due will be paid in a timely manner
B. knowing which types of income currently qualify as exempt from
taxation
C. understanding any types of expenses may be deducted
D. applying current tax laws to the revenue that is received during a given tax
period
3. What is one of the common approaches to tax planning to minimize tax burden?
A. decreasing the number of tax deductions
B. increasing the adjusted gross income for the tax period
C. dealing with the use of tax credits
D. one of these above
4. Which of the following is related to credits?
A. school fees
B. retirement savings plans
C. fees to adopt children
D. all of those above
5. Which kind of people will be received earned income credit
A. persons who earn less than others
B. persons who earn less than a certain amount
C. persons who earn less than a certain amount in several months
D. persons who earn less than a certain amount in a given 12-month year

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3. LISTENING

3.1 You are going to listen to the advertisement from an accounting firm.
Listen carefully andfill in the gaps.

We will get it done. We will get it right. We will help you get on with your life.
That’s the promise of Calvin Dean and Associates. We (1) …………. in tax
accounting. Our experienced (2) …………. help you with all your tax accounting needs.
• Corporate tax
• (3) …………. tax

• Property tax
• (4) …………. tax

• (5) …………. tax

• Value-added tax
In addition to individual and corporate accounting, we also offer (6) …………. tax
preparation services. We (7) …………. you in filling out your tax (8) ………….Then we
will (9) ………….them with the IRS at no additional (10) ………….
Call today to make an appointment.

3.2 Listen again and mark the following statements are true (T) or false
(F)

1. …… The firm works with both individuals and corporations.

2. …… The company does not fill out tax forms.
3. …… There is an additional fee for filing with the IRS.

4. VOCABULARY EXERCISES

4.1
All the words below can be combined with tax or taxation in a two-word
partnership (e.g. tax accounting, progressive taxation). Add tax and/or taxation
before or after the following words:
1. ……… accounting ……….
2. ……… avoidance .……….
3. ……… authority ...……….
4. ……… corporation ……….
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 5. ……… deductible ……….
6. ……… direct…… ……….
7. ……… evasion ….……….
8. ……… income .………….
9. ……… loss ………………
10. ……… payer …………….
11. ……… progressive……….
12. ……… rate…….…………
13. ……… return …………….
14. ……… sales ……………...
15. ……… year ………………
16. ……… base ………………

4.2 Complete the paragraph with the correct words from the box. You will
not use all the words

individuals effort national state

disincentive commonly income motivation
effect funds business revenue

Taxation is a tool (1) …………… used by the government as a means of

redistributing income amongst its citizens. In some countries, taxation can have a positive
(2) …………… on the redistribution of income, other times, it can do more harm than

good.
Taxation helps greatly in the redistribution of income as it gives the government (3)
……………which they can use to fund public services. In countries that have solid taxation
systems, revenue from taxes will be great. The more (4) ……………there is coming from
taxes, the more money there will be leftover for the government to provide public services
to its citizens. Without the tax revenue that taxation offers, services such as protection from
(5) ……………police, provision of transportation infrastructure, social security services.

Social security services like welfare check programs help spread the wealth around a
nation. The poor who don’t have enough to live properly can apply for these welfare
programs, they will receive checks funded by the taxes that (6) …………… in higher
income brackets pay.
On the other hand, there are also several disadvantages of using taxation to
redistribute income. The main problem of using taxation to redistribute income is the
possibility of ridiculously high effective tax rates. Though one might think that high
effective tax rates would equate to more tax revenue, a high tax rate would give citizens a

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(7)…………… to work. People will start to wonder if it's worth putting so much effort
into a job only to later realize that a large chunk of what they earn will be taken from them
and given to the government. This can turn some people off and strip them of their (8)
…………… to work or look for a job.

4.3 Match the words with similar meaning

1. tax liability
2. itemized deduction
3. tax evasion
4. marginal tax rate
5. refund (n)
6. progressive tax
7. tax haven
8. property tax
9. tax shelter
10. to impose a tax

a. the crime of deliberately not paying all the taxes that you should pay
b. a list of deductions from taxable income
c. a tax that has a higher rate for taxpayers with a higher income
d. a category of taxpayers, defined by how much money they make
e. a tax that has to be paid by owners of houses, etc
f. a way of using or investing money so that you can legally avoid paying tax on it
g. a place where taxes are low and where people choose to live or officially register their
companies because taxes are higher in their own country.
h. a rate of tax that is paid on your next unit of income; the highest rate of tax that someone
pays.
i. money that the government gives back to you when you pay too much in taxes, or have
withheld too much from your salary.
j. to introduce a new tax on something
1….2….3….4….5….6….7….8….9….10….

4.4 Use the correct form of these verbs in the following sentences:

avoid be liable deduct evade

levy lower pay raise

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1. If you inherit a lot of money, you ………. for capital transfer tax.
2. In some countries, employers have to ………. tax from your pay and ……….it direct to
the tax authorities, so employees have no possibility of ………. income tax.
3. Some people hire expensive accountants to tell them how to ………. taxes-legally.
4. The government always tries to ………. taxes in the year before elections.
5. The government has a huge deficit and is going to have to ………. either the rate of VAT
or income tax.
6. The government ………. special taxes on petrol, alcohol and tobacco.

4.5 Choose the correct words to complete each sentence:

1. The tax on wages and salaries (and business profits in the US) is called ……….
In Britain, the tax on business profits is called a corporation tax.
a. direct tax
b. income tax
c. wealth tax
2. A tax that is levied at a higher rate on higher incomes is called a ............... tax.
a. progressive
b. regressive
c. value-added
3. Property taxes, sales taxes, customs duties on imports, and excise duties on
tobacco, alcoholic drinks, petrol, etc. are .............. taxes.
a. direct
b. indirect
c. value-added
4. Most sales taxes are slight ................. because poorer people need to spend a larger
proportion of their income on consumption than the rich.
a. progressive
b. regressive
c. repressive
5. A sales tax collected at each stage of production, excluding the already-taxed
costs from previous stages, is called a ……….
a. sales tax
b. value-added tax
c. added-value tax
6. Reducing the amount of tax you pay to a legal minimum is called ……….
a. fiscal policy

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 b. tax avoidance
c. tax evasion
7. Making false declarations is called ............... and is obviously illegal.
a. creative accounting
b. tax avoidance
c. tax evasion
8. Bringing forward capital expenditure (on new factories, machines, and so on) so
that at the end of the year all the profits have been used up is known as making a ……….
a. mistake
b. tax haven
c. tax loss
9. Multinational companies often set up their head offices in low-tax countries such
as Liechtenstein, Monaco, the Cayman Islands, and the Bahamas, known as ……….
a. tax havens
b. tax havens
c. tax shelters
10. Criminal multinationals such as the Mafia tend to pass money through a series
of companies in very complicated transactions in order to disguise its origin from tax
inspectors and the police; this is known as ............... money.
a. cleaning
b. laundering
c. washing

5. SPEAKING

5.1 Individual work

Based on the information in the two texts above, answer the following
questionswith your own words
1. Why do we have tax?
2. What are some approaches to tax planning to minimize thetax burden?
3. What is the difference between tax avoidance and tax evasion?

5.2 Pair work or group work

Read the following statements concerning taxation and government spending.

Which of them are in favor, and which are against? Which ones do you agree with?
Work with your partner(s) and discuss

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6. WRITING

6.1 Rearrange the following words to make complete sentences

1. is/the/marginal/a/rate/generally/disincentive/both/and/working/to/investing/.
………………………………………………………………………………………
2. designed/taxes/can/and/both/to discourage/to encourage/spending/be/.
………………………………………………………………………………………
3. are/sales/because/taxes/unfair/poor/spend/people/more/the rich/than/.
………………………………………………………………………………………
4. variety/companies/have/a/of/ways/of/on/avoiding/their profits/tax/.
………………………………………………………………………………………
5. tax/companies/pay/on/and/their profits/shareholders/pay/on/their
dividends/income tax/.
………………………………………………………………………………………

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 6.2 Complete the following sentences using the given words
1. Indirect/excise/duties/can/designed/dissuade/people/smoking/, drinking
alcohol/, and so on/.
………………………………………………………………………………………
2. Income taxes/ most countries/ progressive/ and/ one ways/ in which/
governments/ can/ redistribute/ wealth/.
………………………………………………………………………………………
3. The primary function/taxation/to raise/revenue/finance/government/expenditure.
………………………………………………………………………………………
4. The problem/progressive/taxex/the marginal rate/always/high.
………………………………………………………………………………………
5.Taxation/tool/commonly/used/government/mean/redistributing/income/amongst/
its citizens.
………………………………………………………………………………………

6.3 Translate the following sentences into Vietnamese

1. Taxation authorities are interested in past financial performance in order to assess
and collect appropriate taxes.
………………………………………………………………………………………
……………………………………………………………………………………………...
2. Taxation laws are enacted to encourage domestic and international corporations
to either invest or raise capital, and tax breaks are given to specific industries or to certain
types of expenses to attract investors and consumers.
………………………………………………………………………………………
……………………………………………………………………………………………...
3. The first purpose of taxation is revenue: taxes raise money to spend on armies,
roads, schools and hospitals, and more indirect government functions like market
regulation or legal systems.
………………………………………………………………………………………
……………………………………………………………………………………………...
4. Taxes are levied to address externalities. Tobacco is taxed, for example, to
discourage smoking, and many people advocate policies such as implementing a carbon tax.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. The personal income tax is a direct tax levied on the income of a person who has
taxable income for a relevant tax period.
………………………………………………………………………………………
……………………………………………………………………………………………...
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 6.4 Translate the following sentences into English

1. Thuế là một khoản nộp bắt buộc mà các cá nhân và tổ chức phải thực hiện
theo quy định của các luật thuế để tài trợ cho chi tiêu công của chính phủ.
………………………………………………………………………………………
……………………………………………………………………………………………..
2. Thuế giá trị gia tăng là thuế tính trên giá trị tăng thêm của hàng hóa, dịch vụ phát
sinh trong quá trình từ sản xuất, lưu thông đến tiêu dùng.
………………………………………………………………………………………
……………………………………………………………………………………………..
3. Thuế lũy tiến là loại thuế áp dụng mức thuế suất cao hơn đối với những người
có thu nhập cao và thuế suất thấp hơn đối với người có thu nhập thấp. Điều đó có nghĩa
là gánh nặng thuế đối với người giàu cao hơn người nghèo.
………………………………………………………………………………………
……………………………………………………………………………………………..
4. Thuế không chỉ đơn thuần là một nguồn thu chủ yếu của ngân sách nhà nước mà
thuế còn gắn liền với các vấn đề về sự tăng trưởng kinh tế, về sự công bằng trong phân
phối và sự ổn định xã hội.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Trốn thuế là hành vi phạm pháp của các cá nhân và pháp nhân nhằm không phải
nộp thuế hoặc không phải nộp đủ số thuế mà họ phải đóng.
………………………………………………………………………………………
……………………………………………………………………………………………...

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