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CH (1) - 18 Taxation
CH (1) - 18 Taxation
18 TAXATION
WHAT IS A TAX?
Taxation is the government’s fiscal policy. It is an important source of revenue to
the government so it can spend on the public sector and provide social goods.
TAX SYSTEMS
There are three types of tax systems
i) Progressive: the proportion of income taken in tax rises as income
rises. Or the higher the income, the higher the tax. The rich pay more
taxes than the poor.
ii) Regressive: as income increases the % of tax decreases. It is
considered unfair as the high income groups pay the least
iii) Proportionate: no matter what the income level is, the same
percentage of tax applies.
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SALIMAH MUSHARRIF Ch. 18 TAXATION
% TAX
A = Progressive
B = Regressive
B C = Proportional
INCOME
ASSIGNMENT
TYPES OF TAXES
Direct tax
Direct tax is a tax taken directly from income or wealth and it is generally
progressive, such as an income tax, which decreases income.
Indirect tax
This is the tax on spending. It decreases consumption as it results in increased
prices. People pay the tax when they purchase the commodity.
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SALIMAH MUSHARRIF Ch. 18 TAXATION
Important: Thus as a V.A.T. is not levied on exports and any VAT can be
reclaimed it is an incentive for exporters to produce.
Customs duties: goods imported from the same trading bloc are not taxed. Those
out of the bloc are taxed to discourage foreign competition
Excise duties: these are taxes levied mainly on volume, the main sources being
tobacco, alcoholic drinks and hydrocarbon oil that is petrol and diesel.
Tariffs: this is a protective duty on imports
Other taxes: motor car, road tax, heavy Vehicle Tax Etcetera
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SALIMAH MUSHARRIF Ch. 18 TAXATION
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SALIMAH MUSHARRIF Ch. 18 TAXATION
i) Incomes:
A high and direct tax decreases incomes which decreases demand, where as a
high indirect tax increases price so that incomes decrease and the standard of
living is adversely affected
ii) Savings and investment:
A higher tax decreases savings and investment
iii) Prices:
A high direct tax decreases incomes, demand, so inflation decreases or deflation
occurs. An indirect tax, however , raises the price.
iv) Effort:
A higher tax results in a disincentive to work
v) Economy:
A high tax results in a low demand so that production decreases, imports
decrease, the balance of payments improves, but unemployment increases as
less is demanded in the economy
vi) Consumption:
If the standard of living is low and savings are being cut down, an indirect tax
decreases consumption. If savings are high, however, it has little effect as people
can pay out of the savings
vii) Incentives:
As taxes are levied on individuals and corporations, disincentive sets in.
However, this is only after a certain level has passed.
B
TAX REVENUE
A
C
TAX RATE
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After a certain level of tax, an increase in the tax rate may force the individual to
work more hours to maintain their standard of living and so.
The higher the tax rate, the less the disposable income so that savings will be
reduced. For a corporation similarly, high taxes will leave less profit and so there
are fewer incentives to invest and expand especially for risky projects.
THE BUDGET
The budget is a document which shows government spending and revenue or
fiscal policy with revenue being generated from taxation and expenditure on
government social projects. Since the amounts of spending and taxation are very
great they can influence inflation, employment, output and, therefore, growth in
an economy.
Budget deficit: this is the situation when expenditures are greater than
revenues. A government may set out a deficit budget in order to increase
aggregate demand and therefore production and employment in an economy.
This should increase growth. The deficit is financed by the sale of securities on
which interest has to be paid. So as spending on the public is high and so is the
interest paid to the people, inflation increases. A deficit budget may also be
planned if economic activity slows down. It is in fact usually during a slump that
a deficit budget is made.
Budget surplus : is when government revenue is greater than government
expenditure. This has a deflationary effect as aggregate demand is low and
people have less money in hand. This decreases prices so that unemployment
may increase as production will decrease. A surplus budget is usually made
when an economy is in the boom.
Balanced budget: is one where expenditures equal revenue. It is very difficult to
prepare and it results in neither an inflationary or deflationary pressure.
GDP
A. Growth
B. Boom
C. Recession
D. Slump
Years
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SALIMAH MUSHARRIF Ch. 18 TAXATION
Assignments
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