How bad is your tax burden?

Syllabus aims…. Understand taxation: direct and indirect; progressive, proportional and regressive taxes.

What 4 reasons are there for a government setting taxes?

Reasons for having taxation Meeting the benefit principle when financing the provision of public services Changing the level and pattern of demand –Macro-economic demand management / macro stability –Micro economic effects of tax changes – influencing consumer choices through the price mechanism Influencing the distribution of income and wealth – using taxation to achieve a more equitable distribution of final income Helping to correct for market failure e.g. environmental taxation

The benefit principle of taxation The ‘benefit principle of taxation’ is that taxes paid have a link with the benefit that the person paying the tax receives from government spending There are some problems with the benefit principle –It ignores the redistributive aims of taxation. The benefit principle is mainly concerned with allocative efficiency rather than equity. –The benefit principle assumes correct revelation of preferences by consumers – whereas in reality many consumers do not have to pay for the public goods and services provided for them (free-riders)

What’s the problems of setting taxes? Jobs Lower profits Lower net income Investment Increases business costs

UK Tax Revenues 2010

Direct taxes Direct taxation –Direct taxation is levied on income, wealth and profit while indirect taxation is levied on expenditure for a good or service –Direct taxes include –income tax, –national insurance contributions, –capital gains tax, –and corporation tax

Indirect taxes Indirect taxation –Indirect taxes is levied on spending on goods and services –Indirect taxes include: –VAT; –excise duties on fuel and alcohol, –car tax, –betting tax and –the TV licence

On your white board write DIRECT tax And on the other side INDIRECT tax

You decide… Income tax National insurance contributions (NIC) Inheritance tax Business rates Corporation tax Capital gains tax Council tax VAT Excise duties Direct tax Indirect tax Direct tax Indirect tax

Which country do you think has the highest tax burden?

A global view of tax revenues

Danish Tax system ‘a simpler’ version….Income Tax Corporation tax VAT at 25%

UK Tax Revenues 2010

Taxes from around the world nks_2009.htmlhttp:// nks_2009.html burden-around-the-developed-world/ burden-around-the-developed-world/

Wikipedia data… 2005 out of date!

Factors affecting tax revenues Oil prices & other costs – affect business profits Changes in the real incomes of people in work The tax base – how many things the government taxes Asset prices – e.g. changes in share and house prices Rate of economic growth and the rate of inflation Level of employment and unemployment Factors that influence total tax revenues

Homework Use textbook p 412 Make your own notes on the inefficiencies of taxes Using the 3 bullet points in the paragraph – add your own micro diagrams to support the criticisms of taxed. P415 – explain the difference between progressive, proportional and regressive taxes.