Fiscal Policy: Taxation 12 th January 2016 LO: To explore the differences between direct and indirect taxes

Objectives of UK tax system  To fund government expenditure  To manage the economy as a whole  To redistribute income  To correct market failure zwGtg

Direct Taxes  Taxes on income paid directly to HMRC by the individual taxpayer  The tax liability cannot be passed onto someone else  Income Tax  Corporation Tax  Inheritance Tax  Capital Gains Tax

UK Income Tax Rates Tax rate Threshold Threshold 0% (Personal Allowance)£10,600£11,000 20% (Basic Rate)£31,785£32,000 40% (Higher Rate)£150,000 45% (Additional Rate)Over £150,000

UK Corporation Tax rates Type of Rate Small Profits Rate (for companies with profits less than £300,000) - 20% 20% 20% Main Rate 20% 21% 23% 24%

UK Inheritance Tax Rates Tax Rate Threshold 0% £325,000 40% Over £325,000 Tax on money and possessions you leave behind you when you die

UK Capital Gains Tax Rates Tax Rate Threshold 0% £11,100 28% if a Higher Rate or Additional Rate tax payer Over £11,100 18% or 28% if a Basic Rate tax payerOver £11,100 Tax on income gained from selling property, selling shares or selling personal possessions

Indirect Taxes  Taxes on spending  Can be shifted from firms to consumer (depending on PED)  VAT  Excise duties (on tobacco, alcohol and petrol)

UK VAT rates Rate% of VATWhat the rate applies to Standard Rate20%Most goods and services Reduced rate 5% Some goods and services (e.g. children’s car seats and home energy) Zero Rate0%Most food and children’s clothing

Automatic Stabilisers

Changes in taxation Scenario: The UK is suffering from negative economic growth and high unemployment Outline what you would do to the level taxation and draw the effect of your action on an AD/AS diagram

Changes in government spending Scenario: The UK is suffering from negative economic growth and high unemployment Outline what you would do to the level of government spending and draw the effect of your action on an AD/AS diagram

Government Spending vs taxation Government spending seen as being more effective at stimulating AD. There is a full multiplier effect. Not all of the extra disposable income from reducing taxation will be spent.  Part will be in the form of savings and imports

What makes a “good” tax system? Adam Smith’s Canons of Taxation  Economical  Equitable  Convenient  Certain

Economical  Simple and cheap to collect  Revenue is maximised and cost is minimised

Equitable  Fair and based on taxpayer’s ability to pay  Justifies progressive nature of income tax  The more you earn the more you pay

Convenient  Payment method ad timing should be convenient to the taXPAYER

Certain  Taxpayer should be clear about what, when and how to pay  Tax evasion should be difficult

2 further principles of taxation  Efficient  Meets its aims  Minimises distortions  Reducing incentives to work  Reducing incentives to invest  Flexible  Capable of easy change in response to changing economic conditions

Hypothecation  Taxes are earmarked for a specific purpose  Tobacco duty used by NHS to tackle smoking-related diseases Can you suggest any other suitable examples of hypothecation?

The Benefit Principle  Taxes should be linked to the benefits that taxpayers receive from the tax