1. AS Economics Mr. Durham durham.j@shishialevel.cn

2. Lesson Objectives In this class we will
Review the different types of taxes, tax systems, and the canons of taxation
By the end of class students should be able to
Define the different types of taxes (direct, indirect) and 3 tax systems
Discuss the equity of the different systems, and the canons of taxation

3. Direct Taxes
Definition: Paid directly to the government from the taxpayer
The consumer or the firm is responsible for paying the whole tax to the government
Example: Income Tax, Corporation Tax

4. Indirect Taxes 2-Types – of Indirect Taxes Ad Valorem Specific Taxes
Definition: are imposed by the government and they increase production costs for producers.
Result: Supply curve shifts left. Price increases. There is movement along the demand curve (a contraction in supply)
2-Types – of Indirect Taxes
Ad Valorem
Specific Taxes

5. Indirect Taxes
Ad Valorem: Tax is a precentage of the value of the goods purchased Specific Taxes: Tax is per unit. Example: $1 per litre of gasoline. Diagram: The amount of the tax is the vertical distance between the two supply curves

6. Burden of Tax
Rule: If the demand is relatively more inelastic than the supply, the incidence of tax will fall mainly on the consumer Example: Demand for cigarettes is fairly inelastic. Result: Firms can pass on much of the tax on to consumers.

7. Ad Valorem Tax
Since the tax is a percentage of the cost of the good, the absolute value of the tax increases as the price of the good increases.
Governmentt Revenue & Elasticity
Rule: If Demand is Inelastic, Government revenue from the tax is higher than if demand is elastic
This is because quantity demanded falls less the more inelastic the demand is

8. Some Key Points - Taxes
Taxes can be expensive for the government to collect
Taxes could be inflationary
Some taxes could be regressive, impacting those on low incomes the most

9. Average & Marginal
Marginal Tax Rate: the rate of tax applied to the next unit of income earned.
Example: I earn $35,000I will pay 25% tax on tat amount. But if I make one more dollar the marginal tax rate is 35% on each dollar that comes after that.
Average Tax Rate: the total tax paid divided by total income. It is a proportion of income
Increasing the average rate of tax as income rises means that the tax is progressive

10. Tax Systems
3 Types
Proportional
Progressive
Regressive

11. Proportional Tax
Definition: has a fixed rate for all tax payers, regardless of income. Also called a flat tax
Example: All taxpayers pay 20% regardless of income
Marginal tax rate will equal the average tax rate
Could encourage people to earn more money, as the tax rate will not change

12. Progressive Tax
Definition: As income increases the rate of tax increases
Should help reduce inequality. Those on lower incomes pay less tax.
Tax is based on ability to pay
Example: Income Taxes in UK
Direct taxes tend to be progressive

13. Regressive Taxes
Definition: a tax where the proportion of income paid as tax is higher for those on lower incomes than those on higher incomes. Example: An indirect tax like a Sales Tax Result: a less equitable (less fair) distribution of income

14. Canons of Taxation
Developed by Adam Smith: They are generally the criteria taxes are judged by
Cost of collecting the tax must be low relative to the amount of tax collected
The timing and quantity paid must be obvious to the taxpayer
The timing and way of paying should be convenient for the tax payer
Taxes should be imposed depending on ability to pay

15. Homework Activity Sheet – Handed Out in Class
See Website for Upload of Multiple Choice Questions.
Internet connection permitting