Brief overview of the stabilizing role of monetary and fiscal policies.
Government business enterprises.
Other policies:
Competition policies.
Environmental policies.
Learning Intentions
Determine what makes an effective tax.
Calculate the taxation revenue obtained by the government.
Distinguish between direct and indirect taxes.
Marking Criteria of a Tax
How to evaluate a tax: Governments need to know if their tax is fair when they are taking people's money, as it can be seen as morally/politically wrong to introduce a tax.
Adam Smith's criteria for evaluating if a tax is effective.
Equity
How the burden of taxation is distributed amongst taxpayers according to their ability to pay.
Vertical equity: Higher taxation for higher income earners.
High income earners should have a higher marginal rate of taxation (MRT).
Horizontal equity: Equal tax burden for taxpayers earning the same gross income.
Is the tax equitable?
Efficiency
Does the tax allow people to still invest, save, consume goods and services, and make products?
Does the tax actively change how people allocate financial resources?
If the tax changes how people allocate their finances by a sufficient amount, it is seen as an inefficient tax.
Simplicity
The public's understanding and certainty over future tax liability and the minimisation of tax compliance.
Reducing tax avoidance (minimising the tax one must pay, which is legal) and tax evasion (not paying taxes, which is illegal).
It needs to be simple & efficient.
Taxation Revenue
How much does the government take?
Taxation\ revenue = Tax\ Base * Tax\ Rate
Tax base: The amount which is being taxed (e.g., income).
Tax rate: The percentage needing to be taxed, outlined in the tax scheme.
Example: Income Tax
How much should I be taxed if I earn $92,000?
Taxation\ revenue = Tax\ Base * Tax\ Rate
Direct vs. Indirect Tax
Direct tax: A tax which is paid by the individuals/companies which are responsible for it; there is no way to pass this tax onto another person (e.g., income tax).
Indirect tax: Taxes imposed on one group of people (e.g., businesses) but are usually passed on partially or fully to the final customer.
Example: The Goods & Services Tax (GST), which is 10%, is passed on to the consumer. The business does not receive that 10% as profit, as it must go to the government as tax.