Taxation Flashcards
(40 cards)
Taxation
the means by which the government raises revenue from individuals and firms to provide public goods and services.
Tax
a compulsory payment to be made by a citizen to a government, for which he or she receives direct benefit in return.
Purposes/Objectives of Taxation include:
To raise government revenue
To control consumer spending
To achieve greater equality in the distribution of wealth and income
Two main types of taxes
Direct Taxes
Indirect Taxes
Direct tax
taxes on income and is when the actual payment and ultimate burden of a tax fall on the same person
Examples of direct tax
Income tax, corporation tax, capital gains tax, capital transfer tax
Define income tax, corporation tax, capital gains tax, capital transfer tax
Income tax- this is a tax placed on earned income
Corporation tax- this is a tax placed on the profits of companies
Capital gains tax- this is a tax placed on the proceeds from the sale of assets
Capital transfer tax- this is a tax placed on the transfer of property
Advantages of direct tax
The taxpayer cannot shift the burden of the tax to be paid ( gov adv)
Direct taxes are progressive and thus promotes equality in the distribution of wealth and income (gov adv)
The taxpayer knows in advance how much tax he has to pay ( taxpayer adv)
Disadvantages of direct tax
High tax causes the taxpayer to work for loopholes to evade taxes
High taxes can contribute to a disincentive to work and also a reduction in earnings
Under the Pay As You From system the real burden of the deduction is not known by the employee, especially in the face of increasing government expenditure
Indirect taxes
taxes on consumption and is when the actual payment and ultimate burden of a tax fall on different persons
Examples of indirect taxes
V.A,T, Purchase tax, excise duty and customs duty
V.A.T
this is a tax placed on goods at each stage of production
Purchase tax
this is a tax placed on certain consumer items
Excise duty
this is a tax placed locally manufactured goods
Customs duty
this is a tax placed on imported products
Advantages of indirect taxes
They are less painful to the taxpayer because the burden is shared(adv to the taxpayer)
They are optional, unlike direct taxes (adv to the taxpayer)
They are the best way to raise revenue from the lower income earners ( adv to the government)
The government can use flexible tax rates ( adv to the gov)
Disadvantages of indirect taxes
Indirect taxes are regressive and thus do not promote equality in the distribution of wealth and income
Indirect taxes lead to an increase in prices (inflation) and the cost of living
Regressive indirect taxes show different preferences for consumption and savings since each commodity is taxed differently.
Forms of taxes
Progressive,regressive, proportional
Define progressive
this tax system is designed to collect higher taxes from those who make more money
Define regressive
this is a tax system which collects the same amount of money from everyone regardless of income
Proportional
A system where there is a fixed rate tax no matter how much you earn
Ways in which the government utilizes the revenue earned from taxation
to provide public goods and services eg roads
to fund government projects that will bring further revenue
to provide social services eg welfare benefits
Other forms of govermment taxes
NIS(national insurance fund, local and central borrowing
Two main banks
commercial eg royal bank and republic bank and central eg central bank of trinidad and tobago
