Taxation

Public expenditure financing:

Borrowing from private sector. Rents from publicly owned buildings and land. Admission charges (eg. from public museums and monuments). Revenue from sale of public services (eg. postal and transport). Proceeds from sale (or privatization) of government owned industries and other publicly owned

assets. Interest charges on government loans to private sector and overseas governments. Tax on incomes, wealth and expenditures.

Taxes are used to...

Raise revenue (for public spending) Manage the macroeconomy (fiscal policies) Reduce income inequality after tax (progressive taxes) Discourage spending on imports (tariffs) Discourage consumption and production of harmful products (excise duty) Protect the environment (environmental policies)

Types of taxes:

Direct tax – Taken directly from individuals or firms and their incomes or wealth. (eg. income tax)

Non transferrable. Tax falls directly on the person or firm responsible for paying it.

Indirect tax – Taken indirectly from incomes when they are spent on goods and services. (eg. GST)

Not applied if income is not spent. Also called expenditure taxes or outlay taxes.

Direct Tax:

Personal income tax – tax on income earned Corporation (profits) tax – tax on profits earned by an organization Capital gain tax – tax on profits gained from selling property Wealth (eg. inheritance and property) tax – tax on high value inherited assets

Advantages of direct taxes:

Major source of tax revenue. Many are progressive (redistribution of income). Take into account people’s ability to pay.

Disadvantages of direct taxes:

Income taxes can reduce work incentives (higher income = higher tax). Taxes on profits can reduce available profits for development (less R&D, less efficiency). High taxes may cause tax evasion.

Indirect tax:

Value added tax (VAT) or Goods and Services Tax (GST)

Excise duty – tax on locally produced demerit goods and timber Import tariffs – tax on imported goods User charges – service tax incurred when a service is used

Advantages of indirect taxes:

Cost effective to collect due to a wide tax base – anyone who buys goods and services will pay indirect taxes. Used to discourage consumption and production of harmful products.

Disadvantages of indirect taxes:

Cost of collecting taxes falls to businesses. Regressive taxes (increased spending = decreased tax). Tax revenues are uncertain due to dependence on spending patterns. Add to price inflation.

Balancing the budget

Budget – plans for public expenditure and raising tax revenues for the financial year ahead.

Budget deficit: public expenditure > tax revenue expansionary fiscal policy applied

Budget surplus: public expenditure < tax revenue contrationary fiscal policy applied

Expansionary fiscal policies increase budget deficit or reduce budget surplus. Contractionary fiscal policies decrease budget deficit or increase budget surplus.

National debt – total amount of money borrowed by public sector of a country over time that is still due

Government must borrow if a budget deficit occurs.

Taxes need to be increased or other public spending cut to pay rising interest charges if national debt expands at a faster rate than national income.