Government Finances and Taxation & Budget 2013

“Michael Noonan insists Budget 2013 will be fair”“Social justice groups appeal for no cuts to social welfare and child benefit payments”Irish Independent Thursday November 29 2012“47% fail to put money aside, says survey”The Irish Times Monday, December 3, 2012

What will you learn today?Key TermsPre-Budget 2013 news & economic factsThe functions of taxationThe difference between progressive and

regressive taxesThe difference between the impact and

incidence of taxationDifferent types of taxesForms of taxationAdvantages and disadvantage of direct

taxation

Key Terms Public goodMerit goodAutomatic stabiliserCorporation taxCapital acquisition taxCapital gains taxExcise dutyCustoms dutyStamp duty

Homework

Pre-budget news & current affairs

Identify and state 3 points of information?

Budget 2013 NewsProperty Tax“The rate to be unveiled by Mr Noonan tomorrow is expected to be 0.18 per cent of the value of the property, with a rate of 0.25 per cent for properties worth over €1 million. The new rate would mean a tax bill of €450 per annum for a house worth €250,000 as opposed to €500 if the rate were 0.2 per cent. It will be introduced in July.”

Budget 2013 News“Child benefit to be cut by €10 per month per child.”Present Rates Pre-Budget:€140 per month for each of the first two children; €148 for the third child; and €160 for the fourth and each subsequent child.

There are additional monthly payments for twins and triplets. However the grant of €635 paid at birth, at 4 years and 12 years ceased in January 2012.

Economic facts:Total Government Debt is

150,737 million euro (CSO, 08 November 2012)

Population = 4.59 million

UnemploymentThe unemployment rate in November 2012

was 14.8% (308,500 people).The largest unemployed group is the 25 to

34 age group (95,700) – this accounts for almost a third of total unemployment.

Long-term unemployment represents 59.9% of total unemployment, with the long-term unemployment rate now at 8.8%.

Youth unemployment remains high (November 2012) 15-19 year olds - 48.5%20-24 year olds - 29.0%

What is the Growth Forecast for the Euro Area in 2014? Which Country / area had the strongest growth in 2010

and 2011? Calculate the average growth forecast for the Euro area

between 2013 and 2017? Using statistics contrast the growth forecast for the US

with both the UK and Euro area? Using statistics compare the growth forecast of the UK

and Euro area in 2012?

Taxation

“Income tax revenues are €230 million behind target.”The Irish Times Tuesday, December 4, 2012

Key TermPublic goods:

These are services which must be provided collectively for two main reasons:Non-excludability - the goods cannot be confined

to those who have paid for it Non-rivalry in consumption - the consumption of

one individual does not reduce the availability of goods to others

Examples of public goods include flood control systems, street lighting and national defence.

Key TermMerit goods:

These are goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.

Examples include health services, education, work training programmes, and public libraries

Key TermAutomatic Stabilisers:

These are economic variables that tend to adjust automatically in line with economic conditions and have a stabilising effect on activity e.g. VAT.

Functions of Taxation To raise money for government

expenditure. To redistribute wealth. To achieve desirable social objectives. To provide merit goods. To provide public goods.

Functions of Taxation Acts as an automatic stabiliser. To achieve some economic objectives

such as: ◦ Reduce inflation ◦ To encourage investment in certain

industries ◦ Balance the balance of trade (Visible

Exports – Visible Imports)◦ Protect particular domestic industries.

Functions of Taxation To provide public goods. Acts as an automatic stabiliser. To achieve some economic objectives

such as: ◦ Reduce inflation ◦ To encourage investment in certain

industries ◦ Balance the balance of trade ◦ Protect particular domestic industries.

Adam Smith’s Canons of TaxationEquity – it should take into account the ability of people to pay the tax.

Certainty – people should know their tax liability at the start of the year.

Convenience – the method of payment should suit the taxpayer, not the government.

Economy – the revenue from the tax should far exceed the cost of collecting it.

Modern AspectsTaxation should not act as a disincentive to work.Taxation should not act as a disincentive to investment.

Pre-Budget 2013 Income Tax Bands

Pre-Budget 2013 Corporation TaxCorporation tax is the tax payable on company profitsThere are two rates of Corporation Tax:12.5% for trading income 25% for non-trading income (e.g.

investment income, rental income)The lowest rate of income tax

is 20%???

Progressive and Regressive TaxesA progressive tax takes a higher percentage of income from a person as that person’s taxable income increases, e.g. PAYE.

A regressive tax takes a higher percentage of income from a low-income earner than from a high-income earner, e.g. VAT.

The Impact / Imposition of TaxationThe Impact / Imposition of Tax:

This refers to the individuals or companies on whom the tax is actually levied (imposed).These have to pay the tax directly to the government. E.g. Excise duty

The (Effective) Incidence of a Tax:

This refers to the people who bear the burden of the tax. E.g. Vat

Different TaxesCapital Gains tax is a tax on the profits from the sale of assets. The standard rate is 30% in respect of disposals of assets.

Capital Acquisition tax is a tax on gifts received or on inheritances. The standard rate of tax is 30% in respect of gifts and inheritances

A lump sum tax is a fixed sum of tax levied on a firm irrespective of its level of income / profit.

Ad valorem tax takes a given percentage of the price of the good.

A specific tax is levied at a given absolute amount on each unit of a good sold; for example, 10 cent on a litre of petrol.

Different TaxesCustoms duty: A tax levied on imports (and,

sometimes, on exports) by the customs authorities of a country to raise state revenue.

Excise duty: A percentage levied on manufacture, sale, or use of locally produced goods (such as alcoholic drinks or tobacco products).

Stamp duty: A tax on legal documents usually in the transfer of assets or property, publications, etc., the payment of which is certified by the attaching or impressing of official stamps.

Forms of TaxationDirect taxesThese are taxes on all forms of income, for example:PAYECapital Gains TaxCapital Acquisition Tax DIRT.

Indirect taxesThese are taxes on transactions, for example: VATCustoms DutiesExcise DutiesStamp Duties.

Advantages of Direct Taxation1. It is a progressive tax – equity.2. It is a convenient form of taxation for

most PAYE workers.3. It is economical – employers collect the

tax and pass it on to the revenue commissioners. No fee is paid to the employer.

4. There is certainty of liability. Tax rates and tax bands are announced in the budget before the commencement of the tax year.

5. It simplifies government budgeting as national levels of income are well known.

Disadvantages of Direct Taxation1. High rates of tax may

discourage work and /or investment.

2. Direct taxes can be avoided by those working in the “black economy”.

3. If there is a small tax base then the burden of tax may be great on those paying the taxes.

Key Terms Public goodMerit goodAutomatic stabiliserCorporation taxCapital acquisition taxCapital gains taxExcise dutyCustoms dutyStamp duty

HomeworkDefine the key termsState and explain the Canons of

TaxationDistinguish between:

1. progressive and regressive taxes2. Incidence and impact of taxation

State and explain advantages and 3 disadvantages of direct taxes.