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Chapter 4.3.5-4.3.6 (Taxation) - Coggle Diagram
Chapter 4.3.5-4.3.6 (Taxation)
Classification of taxes
Progressive tax- Proportion of income taken in tax rises as income increase
Regressive tax- Proportion of income taken in tax falls as income rises
Proportional tax(flat tax)- Same proportion of income whatever the level of income.
Direct taxation
Taken directly from individual or firms and their income or wealth.
Example: income tax/ corporation tax/ inheritance tax
Indirect tax(Expenditure/Outlay taxes)
Taken only indirectly from income when they are spent on goods or services
Example: Sales tax/ VAT/ Tariffs
Impact of direct taxes
Direct taxes advantages
High revenue yield
Can reduce inequalities in incomes and wealth
Based on ability to pay
Direct taxes disadvantages
Reduce disposable incomes and consumer demand
Employer payroll taxes may reduce employment
High income and payroll taxes may reduce labour productivity and economic growth
Taxes on profit can reduce enterprise and investment
High direct tax rates increase tax evasion
Impact of indirect taxes
Indirect taxes advantage
Can target specific products and activities
Expand the tax base
Cost-effective
Flexible
Indirect taxes disadvantage
Inflationary
Regressive and increase inequalities
Revenues from indirect taxes are less certain and predictable
May encourage tax evasion and smuggling