Taxation Learning outcome Y Explain the reasons for taxation SBC Economics Taxation Learning outcome Y Explain the reasons for taxation Describe the main UK taxes Explain progressive, proportional and regressive taxation Describe the canons and characteristics of a ‘good’ tax Evaluate direct and indirect taxes Explain the impact of taxation on incentives Reading: Units 11 & 79

Direct and indirect taxation A tax levied directly on an individual or organisation Indirect tax A tax on a good or service

Reasons for taxation To pay for government spending Governments need money to finance their spending programmes This money comes from the revenues of taxation Some money can come borrowing but the majority must be from tax revenues

Reasons for taxation Correct market failure Government can intervene in markets by changing tax and therefore altering demand Governments may increase the tax on products that create negative externalities i.e. cigarettes, alcohol, cars etc. Governments may give ‘tax breaks’ to products that create positive externalities i.e. solar powered heating

Reasons for taxation Redistribute income The government may wish to reduce the gap between rich and poor in society They can redistribute income from richer parts of society to poorer parts of society The idea is that the benefits to the poorer groups are greater than the losses of the richer groups

Reasons for taxation Manage the economy Taxation influences macro-economic performance Tax can impact inflation, unemployment and the trade balance Changes in taxation can affect aggregate demand and aggregate supply

Taxation in the UK Income tax This is the largest source of income for the government It is a tax on an individuals income over one year Everyone is allowed to earn a set amount before they pay any tax, this is known as a tax allowance Any income earned over that limit (tax threshold) is known as taxable income Taxable income is then split into tax bands, the basic rate of 20% and the higher rate of 40%

Taxation in the UK Corporation tax A tax on company profits The rate of corporation tax was lowered from 30% to 28% in 2007 Companies can claim tax allowances to lower their tax payment i.e. investment allowances

Taxation in the UK Sales tax (VAT) VAT stands for value added tax VAT is a tax on expenditure It is added to the cost of products The current rate is 17.5% There are some goods that have a lower rate such as food, water, children’s clothes, books and public transport

Taxation in the UK National insurance contributions (NIC’s) This is a separate tax to pay for social welfare i.e. pensions and unemployment allowances NIC’s are collected from an individuals income Inheritance tax A tax on the value of assets left on the death of an individual There is a tax allowance of around £250,000 after which assets are taxed at 40%

Taxation in the UK Council tax A tax set by local authorities to pay for local services i.e. rubbish collection, traffic management, street cleaning etc. It is based on the value of an individuals home, the higher the value of their home the more they pay Business rates A tax set by local authorities It is based on the value of business property, the higher the value of their property the more they pay

Taxation in the UK