1. 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

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

3. 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

4. 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

5. 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

6. 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

7. 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%

8. 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

9. 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

10. 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%

11. 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

12. Taxation in the UK