Question 1: Ethics and Theory Flashcards
(37 cards)
What is the Principle of Equity in Adam Smith’s Canon’s
Equity means taxpayers should contribute according to their ability to pay—those with higher income or wealth should bear a greater share.
Horizontal equity: Individuals in similar financial circumstances should pay similar taxes.
Vertical equity: Individuals with greater financial capacity should pay more.
Helps reduce tax avoidance and increase public trust.
Example: Higher earners paying higher income tax rates reflects vertical equity.
What is Horizontal Equity in Taxation, What are the Main Challenges
Horizontal equity means treating individuals with similar economic positions equally
Challenges include:
Defining what counts as “similar position” (e.g. salary vs. dividends).
Comparing different income types and sources (e.g. capital vs. earned income).
Time-based comparisons: Should burdens be equal annually or over a lifetime?
What is Vertical Equity in Taxation, What are the Main Challeneges
Vertical equity requires individuals with greater ability to pay to contribute more.
Challenges include:
Determining appropriate tax brackets and rates.
Measuring ‘ability to pay’ beyond income (e.g., wealth, family obligations).
Designing a progressive system without disincentivising work or investment.
What is the ‘Ability to Pay’ Principle
This principle suggests taxes should be based on a person’s financial capacity.
Justifies progressive taxation (higher income = higher tax rate).
Supports the idea of equal sacrifice: those with more can afford to give more.
Challenges: Difficult to measure total ability (e.g., hidden wealth, debts).
What’s the Benefit Approach Principle, What issues arises from it
States that people should pay taxes in proportion to the public services they use.
Advantages:
Seen as fairer in some contexts (e.g., fuel tax for road users).
Issues:
Hard to measure individual benefit.
May conflict with redistribution goals.
May disadvantage low-income earners who use more public services.
Why is Equity a CENTRAL Characteristic in Tax System
Public support relies on perceived fairness.
Examples:
UK Poll Tax (flat tax) riots due to perceived unfairness.
Criticism of multinationals (e.g., Starbucks, Google) paying low UK taxes.
Studies show people prefer fairness over simplicity in real-world systems.
What is the Certainty Principle in Taxation, Why is it important
Tax rules must be clear so taxpayers know how much, when, and how to pay.
Minimises opportunities for evasion and dispute.
Builds trust and voluntary compliance.
Example: Clear income tax brackets and HMRC guidance promote certainty.
What is the Canon of Convenience for Taxpayers
Taxes should be collected in ways that are easy and timely for taxpayers.
UK examples:
PAYE system: Taxes deducted from salaries automatically.
Tax at source: On interest and dividends, reduces admin burden.
Impact: Improves compliance and reduces administrative costs.
What does Efficiency mean in Taxation, How is it Achieved
The tax system should collect needed revenue with minimal economic distortion.
Avoids deterring productive activity like working or investing.
Efficiency includes:
Low collection/admin costs.
Minimising avoidance.
Not distorting markets.
Example: A broad-based VAT with few exemptions is efficient.
What is the Flexibility Principle in Taxation
Flexibility allows tax systems to adjust with economic changes (e.g., inflation, growth).
Helps maintain stable revenue and respond to new challenges.
UK Example:
Income tax revenue rises automatically with wages (fiscal drag).
Budget adjustments can quickly tweak tax rates or thresholds.
Can the Characteristics of a good tax system conflict
Yes, conflicts often arise—e.g., between equity and efficiency.
A highly progressive tax might reduce work incentives (efficiency loss).
Simplicity might conflict with fairness (e.g., flat vs. tiered rates).
Key judgment: Policymakers must prioritise based on context—equity and admin efficiency are often given more weight.
How do Taxpayers perceive trade offs between simplicity and equity in taxation
While people claim to prefer simpler tax systems, studies show they prioritise fairness.
Simplification can unintentionally benefit the wealthy or reduce progressiveness.
Complex systems may be fairer if tailored to real-life circumstances.
What is the Income Tax Base in the UK, What are the Key Features
Income is a primary tax base in the UK.
Taxes levied on income include Income Tax (IT) for individuals and Corporation Tax (CT) for businesses.
Income includes wages, dividends, rent, interest, and business profits.
Income tax is usually progressive, aligning with the Ability to Pay principle.
Example: A person earning £80,000 pays a higher percentage of tax than someone earning £20,000.
Concept of Comprehensive Income Tax
Proposes equal treatment of all income sources—no distinction between income and capital.
Would eliminate need for inheritance tax, gift tax, and possibly CGT.
Problems:
Difficult to calculate asset value changes annually (e.g., pensions).
Could cause income fluctuations year to year → need for income averaging.
Requires assigning retained company profits to shareholders, creating complexity.
What is the Capital Tax Base in the UK
Capital includes wealth and asset ownership.
UK taxes include:
Capital Gains Tax (CGT) for individuals.
Inheritance Tax (IHT) on wealth transfers at death.
Corporation Tax on chargeable gains for companies.
Capital taxes often complement income taxes, targeting wealth accumulation.
Example: Selling shares for a profit above the CGT allowance triggers a CGT liability.
What is the Consumption Tax Base
Taxes levied when goods/services are purchased or consumed.
UK examples include:
Value Added Tax (VAT) (standard rate 20%).
Excise Duties (e.g., on fuel, alcohol, tobacco).
Typically regressive, as they take a higher proportion of low-income earners’ spending.
Example: A £10 VAT on essential items hits lower-income individuals harder as a percentage of income.
What is a Proportional Taxes
Also known as a flat tax.
Takes a constant percentage of the tax base regardless of income level.
Marginal = average tax rate.
Example: A flat 20% tax on all income, whether you earn £10,000 or £100,000.
What is a Regressive Tax
Takes a smaller percentage as income rises.
Marginal < average tax rate.
Places more burden on lower-income earners.
Example: VAT—everyone pays the same rate, but it’s a larger portion of a poor person’s income.
Advantages and Disadvantages of Income Tax Base
Advantages:
Reflects ability to pay, supporting vertical equity.
Income data is regularly reported (via PAYE/self-assessment), aiding compliance.
Enables a progressive tax structure, helping redistribute wealth.
Broad tax base allows for substantial revenue.
Disadvantages:
Encourages tax avoidance and evasion, especially among high earners.
Can disincentivise work, investment, and entrepreneurship if rates are high.
Complexity from multiple reliefs, bands, and types of income.
Often fails to capture non-monetary benefits or undeclared income.
Advantages and Disadvantages of Capital Tax Base
Advantages:
Targets wealth accumulation, not just income flows.
Promotes intergenerational fairness (e.g., via Inheritance Tax).
Helps reduce long-term inequality by taxing assets and gains.
Can complement income tax by broadening the tax net.
Disadvantages:
Asset valuation is complex and may fluctuate.
Often avoided via trusts, gifts, or offshore strategies.
Can discourage investment and savings.
Difficult to determine when capital should be taxed (e.g., on accrual or realisation?).
Advantages and Disadvantages of Consumption Tax Base
Advantages:
Simple to collect at the point of sale (e.g., VAT).
Encourages savings and investment (taxes spending, not earnings).
Broad base generates steady revenue.
Less prone to avoidance compared to income/capital taxes.
Disadvantages:
Regressive: affects low-income individuals more heavily.
Can distort consumer behaviour (e.g., excise taxes may encourage black markets).
Administrative costs for businesses collecting VAT.
Harder to exempt essentials without reducing revenue.
Advantages and Disadvantages of Progressive Taxation
Advantages:
Supports equity and redistribution of wealth.
Aligns with the Ability to Pay principle.
Can fund social services without overly burdening the poor.
Reduces income and wealth inequality.
Disadvantages:
High rates may disincentivise work or investment.
Complexity due to brackets, reliefs, and allowances.
May lead to avoidance/evasion at higher income levels.
Requires careful design to avoid loopholes or unfair marginal jumps.
Advantages and Disadvantages of Proportional Taxes
Advantages:
Simple and transparent – easier for taxpayers to understand.
May reduce avoidance and administrative burdens.
Treats all taxpayers equally, enhancing perceived fairness by some.
Can encourage compliance due to lower marginal rates.
Disadvantages:
Lacks redistributive effect – may worsen inequality.
Flat rates burden low-income individuals relatively more.
Contradicts vertical equity and the Ability to Pay principle.
Limited flexibility to raise revenue from the wealthy.
