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Slide 5-2

This document provides an overview of taxation and government spending. It discusses different types of taxes like income tax, corporation tax, VAT, and excise duties. It also examines how governments use tax revenue to fund public expenditure and balance their budgets, as well as the concepts of budget deficits, surpluses, and national debt.

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Black arab Galadima
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35 views13 pages

Slide 5-2

This document provides an overview of taxation and government spending. It discusses different types of taxes like income tax, corporation tax, VAT, and excise duties. It also examines how governments use tax revenue to fund public expenditure and balance their budgets, as well as the concepts of budget deficits, surpluses, and national debt.

Uploaded by

Black arab Galadima
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Review 5.

Activity 5.1, 5.2, 5.3, 5.4, 5.5


Exam prep 5.1 pg 290

1
Practice question
In 2008, firms in the Philippines were urging the government not to raise
income tax and corporation tax. They also asked the government to increase its
spending on education and infrastructure.
a) Why would firms want corporation tax to be reduced? [3]

b) Explain how firms might benefit from an increase in government spending on


education and infrastructure. [7]

c) Discuss one way government and one way a central bank might influence
private sector firms. [14]

2
5.2 Taxation
Financing public expenditure
• Borrowing from the private sector

• Rents from publicly owned buildings and land

• Admission charges, for example from public museums and


monuments

• Revenue from the sale of some public services such as postal


services and public transport

• Proceeds from the sale (or privatization) of government-owned


industries and other publicly owned assets

• Interest charges on government loans to the private sector and


overseas governments

• Taxes on incomes, wealth and expenditures


Tax burdens vary
▼ Total taxation as a percentage of GDP, selected countries 2010

Tax burden:
total tax revenue as a proportion of
the national income of a country
How taxes are used

• To raise revenue

• To manage the macroeconomy

• To reduce income inequality after tax

• To discourage spending on imports America’s soft drinks


industry battles proposals
to tax sugary sodas
• To discourage the consumption and
production of harmful products

• To protect the environment


Designing a tax system
• Progressive, regressive or proportional?
Annual income $ Progressive tax Regressive tax Proportional tax
% of income taken in tax % of income taken in tax % of income taken in tax

$5,000 0 30% 20%

$20,000 10% 25% 20%

$50,000 20% 20% 20%

$100,000 40% 15% 20%

• National or local taxes?


• Direct or indirect taxes?
Types of tax
Direct taxes are taken directly
from individuals or firms and
their incomes or wealth.
The burden of a direct tax falls
directly on the person or firm
responsible for paying it.

Indirect taxes are taxes taken


indirectly from incomes when
they are spent on goods and
services.
Indirect taxes may also be
called expenditure taxes or
outlay taxes.
▲ Revenue by source and type of tax, South Africa 2010-11
Direct taxes
• Personal income tax
• Corporation (or profits) tax
• Capital gains tax
• Wealth (e.g. inheritance and property) tax

Advantages of direct taxes Disadvantages of direct tax

• They are a major source of tax revenue • Income taxes can reduce work incentives
• Many are progressive and help to reduce • Taxes on profits can reduce profit available
inequalities in incomes after tax to entrepreneurs to re-invest in their
• They take account of people’s ability to businesses
pay • High tax rates can cause tax evasion
Indirect taxes
• Value added tax (VAT)
• Excise duties
• Import tariffs
• User charges

Advantages of indirect taxes Disadvantages of indirect tax


• They are cost effective to collect • The cost of collecting taxes falls to
• A wide tax base. Anyone who businesses
buys goods and services will pay • They are regressive
some indirect taxes • Tax revenues are less certain
• They can be used to discourage because they depend on spending
consumption and production of patterns
harmful products • They add to price inflation
Balancing the budget
In the Budget a government sets out its plans for public spending and raising
tax revenues for the financial year ahead
Budget deficit Budget surplus

Public expenditure Tax revenue Public expenditure Tax revenue

An expansionary fiscal policy will increase a budget deficit or reduce a budget surplus

A contractionary fiscal policy will reduce a budget deficit or increase a budget surplus
National debt
• A government must borrow if public expenditure exceeds public revenue

• The total amount of money borrowed by the public sector of a country over time
that has yet to be repaid is the public sector or national debt

• Taxes will have to increase or other public spending cut to pay rising interest
charges if the national debt expands at a faster rate than national income

▼ US national debt… ▼ US debt as a proportion of US


GDP
TASKS

Activity 5.6 2 min


5.7, 5.8, 5.9, 5.10,5.11, 5.12

Exam prep 5.2

13

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