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Ch11 Intro to Taxation and Equity (Definition and Classification of Taxes,…
Ch11 Intro to Taxation and Equity
Sources of Finance
Taxes (compulsory)
User Charges
For the delivery of public goods and services
E.g. Toll fees
Admin Charges
Where benefit of public good or service is broad / imprecise
E.g. TV license, various licenses
Borrowing
Inflation tax
E.g. Borrow via a loan levy
Definition and Classification of Taxes
Categories of Tax
Taxes of profit (Companies) - 60%
Taxes on payroll (Individual) - 1.4%
Taxes on property - 1.4%
Domestic taxes (VAT) - 38.4%
Taxes on international trade - 4.4%
Stamp duties - 0.001%
Most important categories
Income tax
VAT
Definition: Transfers of resources from individuals and economic units to Gov that is compulsory
Tax Base and Rates
Bases (Imposed on...)
Income
Wealth (45% bracket)
Consumption (VAT)
Persons (Old way) - lump sum
Rate Structure
Progressive (^ Income / Price = ^ Tax)
Proportional
Regressive (^ Income / Price = v Tax)
Classification of Taxes
General
Broad based taxes
Applies to entire tax bas
No / few exemptions
E.g. VAT
Selective
Narrow based taxes
Applies to select products / income groups
Whole tax base not included
E.g. Sin taxes; Sugar tax
Other Tax Types
Specific / Unit Tax
Fixed amount per unit
Not an Admin Charge
E.g. Duties on sparkling wine
Ad Volorem Tax
Rate based on value
E.g. typically luxuries
Direct vs.
Indirect
Direct Taxes (E.g. Personal Income and Property tax)
Indirect Taxes (E.g. VAT)
Properties of a Good Tax
Generate sufficient income to cover expenditure
Equitable (fair) - burden could be shifted
Taxation Equity (Fairness)
Benefit principle
Contribute in accordance to benefit received; e.g. toll fees
Earmarked Taxes (indirect towards benefit; e.g. fuel levy)
Weakness: Cannot be used for redistribution
Ability to Pay principle
Horizontal equity (equal capacity pay same)
Vertical equity (greater capacity pay more)
Ability to pay: complex to determine
Tax Incidence (Burden) - How taxes affects prices and wages
Concepts
Statutory (legal liability)
Econimic (who actually pays -passed on)
Tax can be passed on, shifted backwards (staff cuts), or avoided (reduce productivity)
Methods
Balanced budget / Secondary budget: Overall distribution effect
Differential: One tax substituted with another; revenue remains constant
Frameworks
Partial equilibrium (ripple effect limited)
Unit Tax: See
Slides Fig11.1
Suppliers
Consumers
Ad Valorem (See Slides)
Pure Monopoly (See slides)
General equilibrium (ripple effect exist)
Selective tax
Tax on product A ^; Price of products A and B ^ (demand shifts); Price of Factor used in A decreases
E.g. Wine (Labor intensive) / Beer (Capital intensive)
General tax
Relative prices remain unchanged
Elasticity
Supply (More elastic Supply = Greater tax burden on Consumer = Less Gov revenue)
Demand (More elastic demand = Greater tax burden on Seller = Less Gov revenue)
Economically efficient (minimize distortions, e.g. job losses)
Admin efficient (low cost to maintain)
Flexible (change as economic situation changes)