Government budget and Taxes

Direct taxes: these take money directly from people’s incomes or from companies’ profits, – Income tax – payable on income – Corporation tax – paid by companies on their profits – National Insurance contributions – these are paid by individuals – Petroleum revenue tax which is charged on the net incomes on North Sea fields

Property taxes – Inheritance tax – paid when money is inherited – Capital gains tax – paid when an asset increases in value and is sold for more than it was bought for – Council tax – this is a local tax paid by households and set by the local government in each area Indirect taxes: these are paid when goods and services are bought, – Value Added Tax (VAT) – Tax on tobacco – Excise duties on alcohol

Receipts Individual income tax – income from: wages, interest on savings, dividends from corporations in which it owns shares, profits from any small businesses it operates Payroll taxes (social insurance taxes) – is a tax on the wages that a firm pays its workers. – Social Security and Medicare for elderly

corporate income tax. – Based on profit - the amount the corporation receives for the goods or services it sells minus the costs of producing those goods or services. – taxed twice: when the corporation earns the profits; and pays dividends to its shareholders. “Other” - excise taxes: gasoline, cigarettes, and alcoholic beverages, also includes estate taxes and customs duties.

Spending A transfer payment – is a government payment not made in exchange for a good or service. National defense. – salaries of military personnel and the purchases of military equipment such as guns, fighter jets,

Income security – Transfer payments to poor families and the unemployed. – Temporary Assistance for Needy Families – Food Stamp program, which gives poor families vouchers that they can use to buy food. – A third program is unemployment compensation, which provides income to people who have recently lost their jobs. Medicare – government’s health plan for the elderly.

Health spending – Medicaid, the federal health program for the poor, and spending on medical research, Net interest. – When a person borrows from a bank, the bank requires the borrower to pay interest for the loan. The same is true when the government borrows from the public. “other” – – many less expensive functions of government: the federal court system, the space program, farm- support programs, housing credit programs, as well as the salaries of members of Congress and the president.

budget deficit - an excess of government spending over government receipts budget surplus- an excess of government receipts over government spending

Tax System A tax is progressive if its average rate increases as income increases. Such a tax claims not only a larger absolute (dollar) amount but also a larger percentage of income as income increases. A tax is regressive if its average rate declines as income increases. Such a tax takes a smaller proportion of income as income increases. A regressive tax may or may not take a larger absolute amount of income as income increases. A tax is proportional if its average rate remains the same regardless of the size of income.

Question Which characteristics should have the good tax system?

A good tax system should Have horizontal equity – people in the same circumstances pay the same amount Have vertical equity – taxes should be fair in terms of rich and poor Be cheap to administer Be difficult to evade; convenient to pay Be easily understood by the taxpayer Have limited disincentive effect, e.g. should not discourage people from working