Financed bySupported byImplemented in cooperation with Financed bySupported byImplemented in cooperation with Basics of Taxation

Financed bySupported byImplemented in cooperation with To understand the impact of taxation to our business and microeconomics we must understand causality of taxation and macroeconomics. Taxes - required payments from citizens and companies to governments. The payments fund projects and expenditures that serve the public interest.

Financed bySupported byImplemented in cooperation with Why does the government tax? Benefit principle – rise revenue to finance government spendingg e.g. financing the public goods and services Macro-economic demand management/ macro stability in inflation and economic growth- changing the level and the pattern of demand Micro economic effects of tax changes – influencing consumer choices through the price mechanism Influencing the distribution of income and wealth –using progressive system of taxation to achive a more equitable distribution of final income and welth between housholds Helping to correct for market failure - e.g. environmental taxation can correct for externalities

Financed bySupported byImplemented in cooperation with Types of taxes: Income tax National insurance VAT Corporation tax Fuel duties Council tax Business rates Other taxes and royalties Stamp duties Toabcco duty Vehicle excise duty Alcoholl duties Inheritance tax Insurance premium tax Capital gains tax Customer duties Betting and gaming duties Air passenger duty Climate change lavy Land fill tax Aggregates levy

Financed bySupported byImplemented in cooperation with Direct taxation levied on income, wealth and profit (include income tax, national insurance contribution, capital gains tax, corporation tax) the burden of direct tax cannot be shifted.

Financed bySupported byImplemented in cooperation with Indirect taxation levied on expenditure (on goods and services), incude VAT, excise duties on fuel and alcohol, cigarets, car tax, betting tax and tv licence. The burden of an indirect tax might be passed onto the customer by the producer. This depends on price elasticity of demand and suppy for the product.

Financed bySupported byImplemented in cooperation with

Financed bySupported byImplemented in cooperation with

Financed bySupported byImplemented in cooperation with

Financed bySupported byImplemented in cooperation with

Financed bySupported byImplemented in cooperation with A value added tax (VAT) is a consumption tax added to a product's sales price. It represents a tax on the "value added" to the product throughout its production process. The VAT system is invoice-based. Each seller in the product chain includes a VAT charge on the buyer's invoice. Under a VAT taxation system, all sellers collect the tax and then pay it to the government. The VAT gives sellers along the supply chain a direct economic motivation to collect the tax, thereby reducing the incidence of tax evasion. Don't confuse the VAT with sales tax. Under a sales tax, the tax is collected only once at the consumer's point of purchase. The VAT tax, however, is collected every time a business purchases products from other businesses within the product's supply chain. The VAT is highly efficient flat consumption tax that reduces the incidence of non-compliance. More than 100 countries have adopted it -- with rates ranging from 10% - 25%.

Financed bySupported byImplemented in cooperation with Progresive taxes the marginal rate of tax rises as income rises – as people earn more income, the rate of tax on each euro earned goes up This causes a rise in the average percentage rate of tax

Financed bySupported byImplemented in cooperation with Proportional taxes with a proportional tax, the % rate of tax is constant across all income levels Regresive tax the rate of tax falls as income rise – duties on cigaretts and alcohol in UK e.g.

Financed bySupported byImplemented in cooperation with General effects of Taxation Personal Income: Tax which is presumed to fall entirely on the legal taxpayers influences decisions to work, save, and invest. These decisions affect other people. Corporate Income: Tax may simply result to lower corporate profits and dividends. It may reduce their income of all owners of property and businesses. The company may move toward raising the prices of their products

Financed bySupported byImplemented in cooperation with Pro for indirect taxes Changes in indirect taxes are more effective in changing the pattern of demand for particular products Indirect taxes are a useful instrument in controlling and correcting for externality effects Indirect taxes are less likely to distort the choice between work and leisure and therefore undermine work incentives Indirect taxes can be changed more easily providing the govermant with increased flexibility Indirect taxes provide an incentive to save and avoid the tax

Financed bySupported byImplemented in cooperation with Arguments against indirect taxes Many indirect taxes have regressive effects on certain consumers and thus make the distribution of income more unequal Rising indirect taxes can cause cost-push inflation as producers pass on higher taxes to retailers Revenue streams are uncertain particulatly when inflation is low or there is an recession when consumer demand falls

Financed bySupported byImplemented in cooperation with How do changes in taxation affect individual incentives? To spend money on specific goods and services? To work or not to work (take leisure)? To seve e.g. for retirement? To take risks e.g. self employement / enterpreneurship?

Financed bySupported byImplemented in cooperation with Taxation and spending choices of custommers Using taxation to achieve environmental aims, e.g. real increase in the cost of fuel duty – effects? Reducing car tax on pollution efficient vehicles – effects? Higher duties on cigarettes – effects? Higher taxes on alcohol and fat foods – effects? Problem: equity, effectiveness, measurement issues

Financed bySupported byImplemented in cooperation with Exercise: How Taxation and work incentives in the labour market causality effects comapies? If the government reduced the basic rate of income tax from 22% to 20% (other things being equal) would this cause a rise in the labour supply? What is the reasoning that people would work more? Why might people substitute work for a greater amount of leisure time?

Financed bySupported byImplemented in cooperation with Taxation and work incentives causality depends of: Marginal tax rate Flexibility of hours Labour migration Leisure hours

Financed bySupported byImplemented in cooperation with Income effects Takes less time working to achive the same amount of income? Does leisure have a high income elasticity or demand? Will some people cut back on their hours having reached a satisfactory target income?

Financed bySupported byImplemented in cooperation with Substitution effects The opportunity cost of taking leisure time has risen,why? The post tax returns from working have increased. An incentive to work longer hours? But are you always more productive?

Financed bySupported byImplemented in cooperation with The Laffer Curve Often used as a justification for lower taxes as a supply side policy to improve incentives Of contemporary relevance given the interest in flate- rate taxes e.g. in Estern Europe Concept that there might be a government revenue maximising tax rate – the peak of the L. Curve Raising taxes beyond this point could reduce tax yields

Financed bySupported byImplemented in cooperation with The Laffer Curve

Financed bySupported byImplemented in cooperation with Economic reasoning of the Laffer Curve The government offers a lump-sum tax rebate or lowers the basic/higher rates of tax Post tax rates of return to working increase – imporved incentives to work at the margin Lower taxes may encourage inflowes of FDI Higher disposabel incoms – boosts consumption Less incentive to avoid/evade taxes Lower company taxes increases planned investment and boosts stock prices (reducing the cost of capital) Lower taxes may lead to an improvement in the long run trend rate of growth for the economy

Financed bySupported byImplemented in cooperation with Conclusion of the exercise: The central question is the elasticity of work with respect to tax rates – will people work longer if taxes are cut? – no guarantees. How many people have flexibility in the working hours? Which is best – a lump sum tax rebate for government or a cut in tax rates? Lower taxation will in the short term increase the size of the government budget deficit, this will increase bond yields (interest rates) which might have a negative effect on demand Really – the Laffer Curve is just an application of the idea of dimicishing returns

Financed bySupported byImplemented in cooperation with Taxation and the supply side economy Tax system can have an important effect on the suppy side on an economy: Income tax and the incentive to work Corporation tax - incentives to invest in new capital, tax competition as a means of attracting foreign direct investment into a country Taxation and the incentive to spend on research and developement Employment taxes and the demand for labour

Financed bySupported byImplemented in cooperation with Changes in direct and indirect taxes can have a big effect on aggregate demand – how?

Financed bySupported byImplemented in cooperation with Changes in direct and indirect taxes can have a big effect on aggregate supply – how? Labour market incentives – cuts in income tax might improve incentives for people to seek work and boost labour productivity Capital spending – lower rates of corporation tax might stimulate a higher level of business investment from domestic and foreign firms Enterpreneurship and new business creation – government spending might be used to found new small business start-ups Research and developement and innovation – tax credits could be used to encourage an increase in business research and development Human capital of the workforce – higher spending on education and training (designed to boost the human capital of the workforce), increased investment in health and transport can also have very important suppy-side effects