Theme 1: Principles of an effective tax system including Adam Smith’s canons and the concept of fairness

Week 1, week 10

What is a tax:

A complulsory levy made by public authorities for which nothing is received directly in return.

Different ways tax can be classified.

By tax base, direct and indirect, tax burden.

What is a tax base?

Something which is taxed

What can constitute a tax base?

A Current income, profits, expenditure, capital and wealth, Pollution, Financial transactions

Why is a clear relationship between a tax and tax base important?

Where there is no acceptable base, history shows society may respond adversely to inequity or unfairness of tax

What is a direct tax?

A tax assessed directly on taxpayer related to taxpayers circumstances

What is an indirect tax?

Tax levied on goods and services purchased by consumer collected or suffered by different people.

What are the ways tax can be classified as in their distribution?

Progressive, regressive, proportional and poll tax.

What is a progressive tax?

Greater percentage of tax on higher income levels.

What is proportional tax?

Taking a constant proportion of tax as tax base rises- so a fixed rate of tax

What is a regressive tax?

Levies the same percentage on products or goods purchased regardless of buyers income- disproportionately difficult on lower income people

What is a poll tax?

Individuals pay the same fixed, absolute amount.

What is Formal Incidence

Who or what organisation has the legal liability to pay the tax

What is effective incidence

Who or what organisation is out of pocket because of the tax.

Main purpose of tax system

Raise revenues for the government

What are the other functions of the tax system?

Influencing and regulating economy, redistribution of wealth, Regulating behaviour and influencing social policy

How do taxes influence and regulate the economy

Allocating resources, stabalising the economy during recessions or booms, Encouraging or discouraging certain behaviours.W

A fact about wealth inequality

The top 1% of households have 230 times more wealth than the bottom 10%

Role of taxes in the redtribution of wealth

Raising revenues that provide essential centrally funded public services such as health and care benefits e.g. Universal credit, Child benefit or health care.

What widens the wealth gap

Tax evasion and aggressive tax avoidance.

How do taxes play a role in the regulation of behaviour and influencing social policy

Discourages consumption of goods bad for health- taxes on tobacco and alcohol.

Encourages enviromenally friendly behaviour e.g. green tax.

Who is Adam smith

known as the father of modern economics

4 canons that should underpin an effective tax system

Equity, certainty, convenience and efficiency.

What is Equity(4 canons)?

Respective ability to pay

What is Certainty(4 canons)?

A tax which each individual is bound to pay ought to be certain and not arbitrary.

What is Convenience(4 canons)?

Every tax ought to be levied at the time in which it is most likely to be convenient for the contributor to pay itW

What is efficiency(4 canons)

How well a tax system operates without wasting resources or distorting economic decisions.

Critiques of adam smiths canons:

Too simplistic for modern tax systems And conflicts between the canons.

What historical event was caused by unfair tax systems

American civil war

What are the key aspects of equity

Horizontal equity, vertical equity

What is Horizontal equity

Treating people with equal circumstances in the same way

What is vertical equity

Discrimination between individual in different circumstances.

Why is horizontal equity difficult to implement

Some people pay more tax based on lifestyle choices