Block A

What does the term taxes mean?

“the term taxes is confined to compulsory unrequited payments made to the general government”

Why do we impose tax?

• Provision of public goods

• Economic stabilisation

• Distributive function- removing resources from the private sector and distributing according to their needs

• Tax expenditures

What are the elements of tax?

• Tax base

• Tax rate

• Tax payer

• Collective mechanism

What is the tax base?

• What is going to be taxed

• e.g. what you earn,spend,own

What is the tax rate?

Percentage applied to compute tax liability

• Average rate= Tax/base

• Marginal rate= Rate on last unit of the base

Who is the tax payer?

Who or what will pay the tax

• legal tax payer- liable under statute

• economic tax payer- actually pays

Explain direct tax?

This is where the legal tax payer pays and it cannot be passed on.

Explain indirect tax?

The legal tax payer pays but it can be shifted to the economic tax payer.

Explain the collection mechanism?

This is how the tax is collected

What is the most convenient way of collecting tax?

Deduction at source

• also must take into account frequency of collection

• Official assessment or self assessment

What are the characteristics of the tax system?

1. Certainty

2. Convenience

3. Economy

4. Equity (fairness)

What does neutrality mean when it comes to tax?

We do not want a tax policy to influence the way a tax payer behaves either socially or economically or the choices they make.

A good tax is a ____ tax

Simple

• Easy for tax payers to understand and therefore comply with

What is vertical equity?

The principle that tax payers with a higher ability to pay should pay more than those with a lower ability to pay.

What is horizontal equity?

The principle that those in a similar financial situation should be taxed identically

What is progressive tax?

Tax rates increase as income increases

• maximizes vertical equity by shifting a greater proportional burden to higher earners

What is proportional/flat tax?

Everyone pays the same fixed percentage of their income, regardless of earnings.

What is regressive tax?

The tax rate decreases as income increases

What are consumption taxes?

Those taxes paid in respect of the enjoyment of final goods or services in the country in which they are consumed?

What are the two categories of consumption taxes?

Broad based

Narrow based

What are the different broad based approaches?

• Wholesale sales tax

• Retail sales tax

• Value added tax

What are the criticisms of increased reliance on consumption taxes?

• Impact on price levels

• Less progressive

• Taxpayer resistance

• Distortion of consumption patterns

What are the taxes imposed at a single stage?

Wholesale sales tax

Retail sales tax

What are the taxes imposed at a multiple stage rate?

Value added tax? goods and services tax