Economic

applications 3

“Welcome to the wonderful world of economics, everything precious in life

has a cost.”

Sayraa Arora
10B

2022-2023
Strawberry fields high school
 Acknowledgment
I would like to thank my economic applications’ teacher, ms. Preeti
Kalsi who gave me a golden opportunity to work on this project. I’d
also like to express my gratitude to my school principal ms. Sangeeta
Sekhon wholeheartedly.
I must also thank my parents and friends for the immense support
and help during this project. Without their help, completing this
project would have been very difficult.
 Project question
Project / Assignment (3):
Comparative study of income tax in two countries with contrasting tax
rates. Please ensure that the following pointers are covered in the project.
You are encouraged to go beyond these as well.
 List of contents

S no. topics Page no.

1 introduction 4
2 Types of taxes 5
3 Types of taxation systems 6
4 Taxation system: effects of high and low taxes 8
5 bibliography 10
 Introduction and meaning of Tax
What Are Taxes?
Taxes are mandatory payments made by a government
organisation, whether local, regional, or federal, to people or
businesses. Tax revenues are used to fund a variety of
government initiatives, such as Social Security and Medicare as
well as public infrastructure and services like roads and schools.
Taxes are borne by whoever bears the cost of the tax in
economics, whether this is the entity being taxed, such as a
business, or the final users of the items produced by the
business. Taxes should be taken into consideration from an
accounting standpoint, including payroll, federal and provincial
income taxes, and service tax.

why taxes are crucial:

A government typically taxes its individual and corporate
inhabitants to help pay for public works and services as well as
to construct and keep the infrastructure used in a nation. The
money raised through taxes is utilised to improve the economy
and the lives of everyone who lives there.
Income taxes are levied on funds received by a taxpayer in the
U.S. and many other nations across the world. The funds may
originate from payments for goods or services, salary income,
capital gains from rising investments, dividends or interest
earned as supplementary income, and so forth.
Public services, government operations, Social Security, and
Medicare are all funded with tax dollars. A tax entails taking a
portion of the taxpayer's income and remitting it to the
government. It is required to pay taxes at the rates set by the
government, and it is illegal to intentionally underpay taxes,
which is known as tax evasion. Contrarily, tax
avoidance—measures used to reduce your tax liability and
increase your after-tax income—is completely allowed. Most
governments employ a division or agency to collect taxes.

We Pay Taxes Because:

For the majority of governments, taxes are their main source of
income. This money is used for a variety of purposes, including
funding public services like schools, emergency services, and
social programmes as well as enhancing and maintaining public
infrastructure, including the highways we use to get around.

Taxes Must Be Paid by Whom?

The taxpayer will vary depending on the kind of tax and any
related regulations. For instance, federal income tax laws often
only apply to those who have an adjusted gross income of a
specific amount. Corporate taxes may only apply to businesses
that have operated in a particular region or that were
incorporated with the intention of conducting business there.
There are frequent exceptions and varied approaches to each
tax.
 Types of taxes
What Kinds of Taxes Are There?

Taxes can be categorised in a variety of ways. Transactions may

result in some taxes (i.e. sales taxes or tariffs). The net financial
performance is subject to additional taxes (i.e. individual income
taxes or corporate income taxes). There are other taxes that are
incurred as a result of singular or irregular events (i.e. estate
taxes, capital gains taxes).
There are several highly popular tax types, including:
Income tax: it is a portion of income that is paid to the state or
the federal government.
Payroll tax: A portion of an employee's income that is deducted
by an employer and paid to the government on their behalf in
order to support Medicare and Social Security programmes
Corporation tax: it is a portion of corporate profits that the
government withholds as revenue to support governmental
programmes.
Sales tax: Taxes imposed on certain goods and services known as
sales taxes; varies by jurisdiction
Property tax: it is based on the value of the land and other assets
Tariffs: these are levied on imported goods as a way to support
domestic businesses.
Estate tax: The fair market value (FMV) of the assets in a person's
estate at the time of death is taxed at a certain rate; the estate's
overall value must be greater than threshold set by state and
federal governments

Types of taxation systems

Four different taxation systems exist:
→ Proportional tax
An income tax system known as a proportionate tax applies the
same percentage of tax to all taxpayers, regardless of their
income. For taxpayers with low, moderate, and high incomes, a
proportional tax is the same. Flat taxes are another name for
proportional taxes.

Proportional tax example

All taxpayers are obligated to pay the same proportion of their
income in taxes under a proportional tax system. If the rate is
20%, for instance, a taxpayer making ₹10,000 will pay at the same
rate, and a person making ₹50,000 will pay 20% tax as well. A
person making ₹70,000 would also pay the same rate.

Person income tax

Person 1 ₹10,00
20%

Person 2 ₹50,000
20%
 Person 3 ₹70,000
20%

→ A progressive tax involves an increasing (or progressing) tax

rate as taxable income rises. It levies more taxes on people with
higher incomes and lower taxes on those with lower incomes.
This is typically accomplished by establishing tax brackets that
divide taxpayers according to income levels.
For instance, if someone makes ₹10,000 and pays 5% in taxes,
then someone else makes ₹20,000 and pays 7% in taxes, and
someone else making ₹30,000 pays 10% in taxes. We can observe
the progression of taxation.

Person income tax

Person 1 ₹10,00
5%

Person 2 ₹20,000
7%

Person 3 ₹30,000
10%

→ A tax that is consistently imposed and levies a higher

percentage of revenue from low-income earners than from
middle- and high-income earners is said to be regressive. It is
opposed to progressive taxes, which rob higher-income earners
of a bigger percentage of their income. A regressive tax reduces
the tax burden as income increases. Sales tax, gas tax, and
payroll tax are some instances of regressive taxes.
For instance, if a person makes ₹10,000 and pays 10% tax,
another person makes ₹20,000 and pays 7% tax, and another
person makes ₹30,000 and pays 5% tax. We can observe the
regression of the taxes.
→ Digressive tax is a hybrid of proportional and progressive tax.
In the case of a progressive tax, the tax rate first rises as income
increases and then stays the same or doesn't change when
income increases further.

Example: A person earning ₹10,000 pays 5% tax, the same person

earning ₹20,000 pays 7% tax, the same person earning ₹30,000
pays 10% tax, and so on. Later, if the person's income rises to
$40,000, he or she will still pay 10% tax.

Person income tax

Person 1 ₹10,00
5%

Person 1 ₹20,000
7%

Person 1 ₹30,000
10%

Person 1 ₹40,000
10%

Person 1 ₹50,000
10%
 Taxation rates: comparative analysis
A country with high taxes: Greece - 24%
In the long-term, the Greece Personal Income Tax Rate is
projected to trend around 44.00 percent in 2023. In Greece, the
Personal Income Tax Rate is a tax collected from individuals and
is imposed on different sources of income like labour, pensions,
interest and dividend, Revenues from the Personal Income Tax
Rate are an important source of income for the government of
Greece.
Effects of high taxes:
→ Inadequate income : A significant tax burden is the overall
result of all of the effects described below. Because only workers
generate money, only they bear the weight of this burden. The
average worker currently pays roughly 73 percent of their
income in taxes when all of these effects are taken into account.
People therefore cannot survive on their incomes.
→ Low wages : Businesses pay so many taxes to various
governments that "taxes" is usually the top budget line item on
their ledger sheets. These taxes steal money that would have
been used to pay wages. Consequently, firms are unable to pay
competitive wages.
→ High costs: Businesses pay so many taxes to various
governments that "taxes" is usually the top budget line item on
their ledger sheets. In order to raise money for these levies,
businesses must raise their pricing. Thus, product costs increase.
The result is inflation.
→ Product discontinuation and non-availability: Businesses are
unable to produce as many things as they once could because
high taxes increase their costs. Products with lower demand for
quantity can be expensive to stock because of property taxes.
Additionally, producers are unable to afford both paying taxes
and producing goods with low demand. As a result, consumers
who have allergies to widely used products are unable to
purchase any useful goods.
→ homelessness: People who first went into mortgages or rental
agreements with the ability to pay them now are unable to do so
due to the high cost of taxes. Additionally, landlords are unable to
pay their mortgages and taxes, which results in the loss of rental
units. In addition, the government swiftly seizes the property
and sells it at an auction during a sheriff sale if the taxes are not
paid. So, a large tax burden results in evictions and foreclosures.
→ poverty and crime: The number of individuals living in
poverty rises as more people find it difficult to make ends meet.
The budgets for social programmes funded by the government
are further strained as a result. This means that none of the
impoverished have enough to eat.
Since the government overtaxed the economy and made it
difficult for the poor to find employment, many of them turned
to crime in order to maintain their families. As a result, crime
rates increase. The rate of violent crime also rises since robberies
make up a large portion of those offences.
A country with low taxes: Andorra - 10%
The tax rates in Andorra are as follows: 10% on income for
people and businesses; no sales tax; however, there is a 4.5% VAT;
no inheritance, estate, or transfer taxes; and no tax is paid on
income from Andorra investments.
With a population of 20,000, Andorra is regarded as one of the
safest countries in the world. Its capital, La Vella, recorded just
one armed robbery in 2015. A value-added tax (VAT) encourages
Europeans to frequently travel there for day trips to buy
cigarettes, alcohol, clothes, or electronics.
Effects of low taxes
→ a surge in spending: The revenue available for workers'
discretion will rise. Since they would keep a larger portion of
their gross income with reduced income tax rates, they would
essentially have more money to spend.
→ Higher economic growth: We might anticipate a surge in
consumer expenditure with reduced tax rates since workers will
likely be better paid. A rise in consumer expenditure should
result in an increase in aggregate demand (AD), which should
boost economic development because consumer spending makes
up about 60% of AD.
→ Government borrowing: Tax reductions will, ceteris paribus,
result in decreased tax collection, which is likely to result in
increased borrowing. Although other economists contend that
lowering income taxes will boost productivity, offsetting this
revenue decline.
→ People may work more hours if income tax rates are lower. If
you get to keep more of your earnings, working overtime is more
beneficial. People can be enticed to relocate there by lower
income tax rates. This is the substitution effect, whereby work is
more alluring when tax rates are lower.
→ The income effect is another factor, though. It is simpler to
reach your desired income by working fewer hours when tax
rates are lower (and, consequently, salaries are greater). Tax
reductions may not boost the labour force since people don't
need to work more if their jobs are well-paying.
 Bibliography

https://www.investindia.gov.in/taxation

https://tradingeconomics.com/country-list/personal-income-tax-rate

https://www.cnbctv18.com/world/fed-up-with-tax-payments-here-are-14-co
untries-with-no

https://www.ukessays.com/essays/economics/advantages-and-disadvantage
s-of-a-income-tax-economics-essay.php

https://quickonomics.com/three-types-of-tax-systems/#:~:text=Three%20Typ
es%20of%20Tax%20Systems.%201%201%29%20Proportional,2%202%29%2
0Regressive%20Taxes.%203%203%29%20Progressive%20Taxes.

https://groww.in/p/tax/