TAXATION

SHARLEAN MAYNE-LAWSON
 SPECIFIC OBJECTIVES

STUDENTS WILL BE ABLE TO:

• Define taxation
• State the objectives of taxation
• Identify categories of taxation, with the use of examples
• Explain types of taxation with the use of graphs
• Identify characteristics of a good tax system
• Explain transfer payment
• Identify advantages and disadvantages of direct taxation
• Identify advantages and disadvantages of indirect taxation
 INTRODUCTION

ROLE OF GOVERNMENT IN STABILIZING THE ECONOMY

• All governments have to take some level of responsibility for the smooth
running of the economy. The government will receive data about the level
of inflation, the foreign exchange, the level of imports and exports,
taxation etc.

• Based on this data, the government will design economic policies to

improve economic activities to increase economic growth and achieve
other objectives
 INTRODUCTION

The two main policies by which the government intervenes are:

• Altering interest rates through the central bank. Note, reducing interest rates tend to
encourage borrowing and discourage savings. Increase interest rates tend to discourage
borrowing and increase savings. By this the government can increase or decrease the quantity of
money in the economy.

• Changing the level of government deficit – the government will influence the economy by:
• Spending money through promoting work, example, Building hospitals or the JEEP programme

• Taking money out of the economy through taxes

 DEFINE TAXATION

• Taxation is a fee charged by the government on a product, income or activity

• A Tax is a compulsory financial charge or some other type of levy imposed on a taxpayer
by a governmental organization in order to fund government spending and various public
expenditures
 OBJECTIVES OF TAXATION
OBJECTIVES OF TAXATION
• The basic objective of taxation is to raise revenue from individuals and companies
to provide public goods and services

OTHER OBJECTIVES ARE SEEN AS:

• To provide transfer payments , grants and subsidies to the poor
• To pay salaries and wages to government workers
• To restrict foreign imports
• To protect infant industries example agriculture
• To promote economic growth and development
 OBJECTIVES OF TAXATION

• To check inflationary measures and stabilize the economy

• To reduce inequalities of income and wealth through redistribution
• To encourage savings and investment
• To correct deficit in the balance of payments
• To control business spending and profits
• To discourage people from harmful activities. Example, smoking and
drinking of alcohol
• To improve the national income
 CATEGORIES OF TAXATION
TAXATION CAN BE:
• DIRECT - Levied by the
government on the income or wealth
of individuals and companies.
• Example are income tax, national
insurance contribution, corporation
tax
TAXATION CAN BE:
• Indirect- levied by the government
indirectly on the buyer based on the
consumption of goods and services.
• Examples are value added tax or
sales tax, general consumption tax
(GCT), petrol duty, betting and
gambling tax, licenses, motor
vehicle tax.
 TYPES OF TAXATION
DIRECT TAX
INDIRECT TAX
 1. What is taxation? (2 marks

2. State FOUR objectives of taxation (4 marks)

3. Explain, giving examples the following: (2 marks each)

i. Direct taxation

ii. Indirect taxation

VIDEO
 TYPES OF TAXATION
Note, taxes can be progressive, regressive or proportional.

• A progressive tax is where one pays a greater portion of their income

the higher you are on the scale. Require upper-income families to pay a
larger share of their incomes in taxes than those with lower incomes.
Personal income taxes are usually progressive
 TYPES OF TAXATION
Note, taxes can be progressive, regressive or proportional.

Regressive tax – takes a greater percentage from the poor than from the
rich. Tax systems require that low- and middle-income families pay a higher
share of their income in taxes than upper-income families. Sales taxes, excise
taxes and property taxes tend to be regressive
 TYPES OF TAXATION
Note, taxes can be progressive, regressive or proportional.

• Proportional tax- takes the same proportion of income from a

person regardless of their income or flat tax systems which take the
same share of income from all families.
4. A progressive tax is:
A. where persons pay a greater portion of their income the higher you are on the income scale.
B. require lower-income families to pay a larger share of their incomes in taxes than those with larger
incomes
C. where persons pay a lesser portion of their income the higher you are on the scale
D. where all persons pay the same amount of taxation

5. A regressive tax is
E. where the poor pays a larger percentage than the rich.
F. where the poor pays a lesser percentage than the rich
G. where all persons pay the same amount of taxation
H. where persons pay a greater portion of their income the higher you are on the income scale.

6. A proportional tax
I. takes the same proportion of income from a person regardless of their income
J. where the poor pays a larger percentage than the rich.
K. where the poor pays a lesser percentage than the rich
L. where persons pay a greater portion of their income the higher you are on the income scale
 PROPERITES OF A GOOD TAX SYSTEM

Adam smith said that taxes should be:

Proportional
Certain
Easy to collect and pay
Cheap to collect
 CHARACTERISTICS / PRINCIPLES OF A GOOD TAX SYSTEM

• Equity – this measures the ability of an individual to pay and is best measured by the
individual’s wealth, income or consumption

• Simplicity – the tax system must be simple and cheap for the taxman to collect and
easy for the taxpayer to understand and comply but difficult to evade

• Economic efficiency- taxes should not encourage individuals or firms to indulge in

tax evasion. Taxes should remove disincentives and promote economic growth
.
 CHARACTERISTICS / PRINCIPLES OF A GOOD TAX SYSTEM

• Neutrality- tax collection should be ‘neutral’ and not affect peoples’ choices
between work and leisure

• Adjustable –A tax system should be flexible and allow the individual to make
adjustments easily – as circumstances change

• Convenience- taxes should permit the individual to enjoy his property and rights

• Certainty- the tax system should be fixed and true and not prone to fluctuations.
7. Adam smith said that taxes should be:
I. Proportional 8. A good taxation system must have
II. Certain specific principles or characteristics.
III.Easy to collect and pay Explain the following: (2 marks each )
IV.Cheap to collect • equity

• Simplicity
A. I only
B. I and II only • Neutrality
C. I, II and III only • adjustable
D. All of the above
• Certainty
 EXPLAIN TRANSFER PAYMENTS

• Redistribution of income and wealth is the transfer of income, wealth or

property from some individuals to others caused by a social mechanism such as
taxation. This is done to ensure that the persons below the poverty line are able
to afford the basic necessities example, food. Transfer payments are food
stamps PATH etc
 DIRECT TAXATION

•
DISADVANTAGES
ADVANTAGES
• The principle of equity can lead to • May act as disincentive to work
fairness
• High direct tax may encourage wealthy
• High tax can be levied on high income persons to migrate

• The paye system is convenient to both • Expensive to administer the tax system to
the taxpayer and the tax collector ensure every one pays the correct amount
 DIRECT TAXATION

• ADVANTAGES DISADVANTAGES
The collection is passed from the inland
revenue to the employer
• The assesse can submit a false
return of income and thus evade
• The burden of taxation cannot be shifted to the tax.
another individual

• If the taxes are too heavy, they

• Tax avoidance is minimized
discourage saving and investment.
In that, case the country will suffer
• Tax payer pays tax when income is received
economically.
 INDIRECT TAXATION

ADVANTAGES DISADVANTAGES

• Indirect taxes are optional and less • They tend to be regressive as the

painful to tax payers burden falls more on the poor than

the rich

• Then best way to raise revenue from • They add to inflation by increasing
low income earners prices

• Cannot be evaded since they are • They are uncertain in yield unless
included in the price of commodities necessities are taxed
 INDIRECT TAXATION

ADVANTAGES
• Do not bring about dis-incentive to
work
• Can be adjusted by the government
according to fiscal policy of expansion
or contraction
DISADVANTAGES
• They tend to be regressive as the burden
falls more on the poor than the rich
• They add to inflation by increasing
prices

• High indirect taxes can cause a shift in • They are uncertain in yield unless
demand for certain harmful goods
necessities are taxed
example Cigarettes
9. State THREE advantages of direct taxation (3 marks)

10. State THREE disadvantages of direct taxation (3 marks)

11. State THREE advantages of indirect taxation (3 marks)

12. State THREE disadvantages of indirect taxation (3

marks)