Types of Taxes

9 Key excerpts on "Types of Taxes"

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  eBook - ePub

  Financial Management and Accounting in the Public Sector

  • Gary Bandy(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  It is conceivable, and perhaps likely, that when a government imposes each new tax it does so for a discrete purpose (e.g. Tax A is to raise income; Tax B is for regulation and so on) but over time all new taxes become established, part of the whole system of taxes and part of the political decision-making process. This means that the purpose of the tax may evolve, perhaps developing a hybrid purpose. It is, if nothing else, easier for a government that wishes to implement a policy change to consider whether it can achieve the desired effect by adjusting an existing tax rather than creating a new one. An example of this is the changes to the standard rate of VAT in the UK between 2008 and 2011.

  The basic rate of VAT in the UK had been 17.5 per cent since 1991 but was lowered to 15 per cent (the rate it had been from 1979 until 1991) in December 2008 for a fixed period of 13 months. The reason for this was to stimulate the economy in response to the global recession by reducing the retail price of many goods and services. In June 2010 the Chancellor of the Exchequer George Osborne announced that the standard rate would rise to 20 per cent from January 2011, a change in the rate that was expected to yield an additional £13 billion a year. Osborne (2010 ) said, ‘That is thirteen billion pounds we don't have to find from extra spending cuts or income-tax rises’, indicating that the purpose of the increase was to generate income.

  Types of Taxes

  Taxation is a subject rife with jargon. This section explains various Types of Taxes and what is meant by terms like direct, indirect, progressive, regressive, equitable, efficient and buoyant when used to describe a tax. First, taxes can be classified into four types: income, consumption, wealth and poll taxes.

  Income taxes

  Income taxes are taxes levied on earnings and in this context income would include earnings from overseas interests and income from investments and savings as well as the salary or wages received from paid work. Examples include personal income tax for individuals and corporation tax for businesses.

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  Public Sector Revenue

  Principles, Policies and Management

  • Alberto Asquer(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Contemporary tax systems are populated by a variety of taxes, which include, for example, personal income tax, corporate income tax, sales tax, VAT, excises, custom duties, stamp tax and so on. Some taxes have been levied for many years, like, for example, the personal income tax in the UK, which was first established by William Pitt the Younger in 1798 to pay for preparation for the Napoleonic Wars and that, after a number of periods when it was repealed, became a stable component of the British tax system during the nineteenth century. Other taxes have been introduced relatively recently, like, for example, VAT which was first established in France in 1954 and then spread throughout most countries in the world. Sometimes, however, taxes are short-lived: for example, in 2015 the Punjab government of Pakistan introduced a 19.5% tax on Internet connections, which was repealed after some months following popular protest.

  A broad distinction is commonly made between two Types of Taxes, namely direct and indirect ones (Atkinson, 1977). Direct taxes are paid directly from taxpayers to imposing entities. They consist of levies that are based on the economic conditions related to an entity (an individual or a legal entity), such as their income or property. Examples of direct taxes include personal income tax, corporate income tax, property tax, inheritance tax and social security (e.g. National Insurance contributions in the UK). Indirect taxes, instead, are paid indirectly from the bearer of the ultimate tax burden to imposing entities through an intermediary. They consist of levies that are based on economic events, such as acts of production and transaction of goods. Indirect taxes are typically collected and paid by an entity (such as the producer of a good or a merchant) although the actual cost of the tax is charged to another entity (typically the final consumer of the good). Examples of indirect taxes include sales tax, VAT, excises and custom duties.

  Nowadays most countries in the world employ a mix of direct and indirect forms of taxation. But which one of the two forms of taxation is preferable? Before addressing this question, which has attracted considerable attention in the scholarly literature (Atkinson and Stiglitz, 1976; Auerbach, 1985; Cremer and Gahvari, 1995; Cremer et al., 2001; Martinez-Vazquez et al., 2011), a distinction should be drawn between progressive and regressive

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  Microeconomics in Context

  • Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Pratistha Joshi Rajkarnikar, Brian Roach, Mariano Torras(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Fortunately, one need not comprehend the imposing complexity of tax laws to understand the crucial role of taxes in modern societies. Taxation is an important topic for students of economics. Tax policies have important economic consequences, both for a national economy and for particular groups within the economy. Tax policies are often designed with the intention of stimulating economic growth—although economists differ significantly about which tax policies are most effective at achieving this. Taxes can create incentives promoting desirable behavior and disincentives for unwanted behavior. Taxation provides a means to redistribute economic resources toward those with low income or special needs. Taxes provide the revenue needed for important public services such as social security, health care, national defense, and education.

  Taxation is as much a political issue as an economic issue. Political leaders have used tax policy to promote their agendas by initiating various tax reforms: decreasing or increasing tax rates, changing the definition of taxable income, creating new taxes on specific products, and so forth. Of course, no one particularly wants to pay taxes. Specific groups, such as corporations, farmers, or retired individuals, exert significant political effort to reduce their share of the tax burden. Tax codes are packed with rules that benefit certain groups of taxpayers while inevitably shifting more of the burden to others.

  In this chapter, we take a look at taxes and tax policy. First, we consider taxes from a theoretical perspective based on the economic models from earlier chapters. Second, we summarize the different Types of Taxes, with an emphasis on the United States. Third, we present an international comparison of tax policies. Finally, we address current tax debates, including the distribution of the tax burden among different groups.

  1 . Economic Theory and Taxes

  1.1 Taxes in the Supply-and-Demand Model

  The supply-and-demand model we presented in Chapter 3 can be used to gain insights into the effects of taxation on consumers and producers. To incorporate taxes into our model, we consider a per-unit tax on a product or service, referred to as an excise tax

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  Business Economics

  • Rob Dransfield(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  To raise revenue. The earliest taxes were raised by governments to pay for the expenses of the rulers of a country and to finance wars. Today, taxes are levied to raise money to cover a range of government expenditures – for example, on building schools, hospitals and roads, paying for defence and a police force.
• To discourage certain activities – for example, those that some see as anti-social in terms of the damage to health and pollution that they cause, such as smoking or driving. So cigarettes, cars and fuel may be heavily taxed.
• To discourage the import of goods. Import taxes are referred to as tariffs. They can be levied as a percentage of the value of imports (an ad valorem tax) or a set tax on each item imported (a specific tax).
• To redistribute income from the rich to the poor.
Economists make a distinction between:
• Direct taxes, for which the burden falls on the person paying it – for example, when you pay income tax it is taken directly from your wages and paid to the government.
• Indirect taxes, which are imposed by governments on goods and services, but are eventually paid by consumers rather than by businesses that collect the tax for the government in the first instance.
The payer of a direct tax has no choice about whether they pay the tax. In contrast, consumers can decide whether or not to buy a good with a tax on it. Because of this element of choice some people believe that the government should rely more on indirect than direct taxes. For example, Conservative governments in Britain have always favoured indirect taxes such as VAT rather than direct taxes such as income tax (which it sees as a disincentive to work).
Progressive, regressive and proportional taxes If income is going to be redistributed then the rich need to pay more in tax than the poor.
A progressive tax takes a greater proportion of income from a wealthy person than from a poor person. So someone earning £20,000 a year might pay 15 per cent tax on this income (£3,000), someone earning £50,000 a year might pay 20 per cent tax on this income (£10,000) and a person earning £100,000 a year 25 per cent tax on this income (£25,000). In each case the richer the person the more disposable income that they have after tax (see Table 14.4