TAXES AND GOVERNMENT BUDGET TOPIC 7 TAXES AND GOVERNMENT BUDGET

Taxes Taxes is a compulsory levy on private individuals and organisations by the government to raise revenue to finance expenditure on public goods and services

Structure of Taxes Direct taxes : tax is imposed directly on persons whom it is desired and intended should pay Indirect taxes : tax is levied indirectly such as excise duty, purchase tax, customs duty

Purpose of Taxation To collect revenue To redistribute income To combat inflation To correct an adverse balance of payment To check consumption of goods which are considered undesirable To protect local / infant industries

Types of Taxes Regressive taxation : effective tax rate increases as the taxable income base decreases Proportional taxation : the same tax rate is charged whatever the size of the income Progressive taxation : the higher the income the higher the tax rate

Budget A government’s budget deficit is the difference between what it spends (G) and what it collects in taxes (T) in a given period: Budget deficit = G – T If G exceeds T, the government must borrow from the public to finance the deficit. It does so by selling Treasury bonds and bills. In this case, a part of household saving (S) goes to the government. Budget surplus : revenue more than expenditure Balanced budget : expenditure equals revenue