3

3. Principles of tax system design

Outcome

 Outline issues of tax system design

 5 desirable characteristics of the tax system
 State the range of the tax bases from which a tax system may be built.
 Discuss merits and limitations of each of these tax bases.

3 main tax categories

1. Income tax – Income or corporation tax

Taxpayers income earned or received

2. Wealth tax – Capital gains tax, Inheritance tax, stamp duty, council tax

Taxes on a taxpayer accumulated wealth, its transfer or on its changing value

3. Consuming tax – VAT, Excise Duties

Taxpayers spending

Taxpayer behaviour in response to new tax systems, policies

 Hard to predict, society is complex

Examples

 Tax according to co2 emission level for company car.

 Sugar tax

Personal Income taxation topic 4

NIC

National Insurance Contribution

 To fund NHS, state retirement pension, unemployment and sickness benefit

Four main classes

1. Class 1 – Paid by both employees and employers

2. Class 2 and 4 and paid by the self-employed
3. Class 3 – Voluntary basis
Block E

Behaviour impact of taxes

Incidence of tax

 Who ultimately pay the tax?

Income tax?

Sales & consumption taxes

Corporation tax?

Impacts of tax reliefs.

Grants
Susidy of money

Visible, high level of accountablilty

Tax expenditures

Reducing tax

Hiddle: ambiguous accountablitliy

Provide benefit to large population without accessing each applicant

Save costs of tax collection

More difficult to control

May generate interest groups

Exemption

Deduction

Credits

Rate reliefs

Tax free threshold

Tax deferral

Administration concession

Distortions

Fiscal Neutrality – a tax system that does not discriminate between economical or personal
choices.

Tax and the labour supply

Examples of policies that influence taxpayers decisions