1. TAXES AND GOVERNMENT BUDGET
TOPIC 7
TAXES AND GOVERNMENT BUDGET

2. Taxes
Taxes is a compulsory levy on private individuals and organisations by the government to raise revenue to finance expenditure on public goods and services

3. Structure of Taxes
Direct taxes : tax is imposed directly on persons whom it is desired and intended should pay
Indirect taxes : tax is levied indirectly such as excise duty, purchase tax, customs duty

4. Purpose of Taxation To collect revenue To redistribute income
To combat inflation
To correct an adverse balance of payment
To check consumption of goods which are considered undesirable
To protect local / infant industries

5. Types of Taxes
Regressive taxation : effective tax rate increases as the taxable income base decreases
Proportional taxation : the same tax rate is charged whatever the size of the income
Progressive taxation : the higher the income the higher the tax rate

6. Budget
A government’s budget deficit is the difference between what it spends (G) and what it collects in taxes (T) in a given period:
Budget deficit = G – T
If G exceeds T, the government must borrow from the public to finance the deficit. It does so by selling Treasury bonds and bills. In this case, a part of household saving (S) goes to the government.
Budget surplus : revenue more than expenditure
Balanced budget : expenditure equals revenue