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

2. Objectives of UK tax system  To fund government expenditure  To manage the economy as a whole  To redistribute income  To correct market failure http://www.youtube.com/watch?v=YfI3Yx zwGtg

3. 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

4. UK Income Tax Rates Tax rate2015-16 Threshold2016-2017 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

5. UK Corporation Tax rates Type of Rate2015201420132012 Small Profits Rate (for companies with profits less than £300,000) - 20% 20% 20% Main Rate 20% 21% 23% 24%

6. UK Inheritance Tax Rates Tax Rate2015-16 Threshold 0% £325,000 40% Over £325,000 Tax on money and possessions you leave behind you when you die

7. UK Capital Gains Tax Rates Tax Rate2015-16 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

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

9. 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

10. Automatic Stabilisers

11. 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

12. 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

13. 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

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

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

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

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

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

19. 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

20. 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?

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