Taxation | Economics for GCSE/IGCSE - Year 11 PDF Download

The Classification of Taxes

• The primary means through which the government generates revenue is taxation.
• Taxation can be categorized into two main types: direct taxes and indirect taxes.

Direct Taxes

• Direct taxes are levies imposed on individuals and businesses based on their income and profits.
• Individuals or firms pay these taxes directly to the government.
• Examples of direct taxes include income tax, corporation tax, capital gains tax, national insurance contributions, and inheritance tax.

Indirect Taxes

• Indirect taxes are applied on spending rather than directly on income or profits.
• Consumers pay these taxes when they make purchases.
• The amount of indirect tax paid is influenced by the level of consumer spending.
• Examples of indirect taxes encompass Value Added Tax (VAT), taxes on demerit goods, and excise duties on products like fuel.

Progressive, Regressive & Proportional Tax Systems

• Tax systems are categorized into progressive, regressive, or proportional.
• The majority of nations employ a combination of progressive taxes, which target direct taxation, and regressive taxes, which focus on indirect taxation.

An Explanation of Tax Systems

• Progressive tax systems are structured based on the concept of marginal tax rates.
• Computing an individual's personal income tax entails multiple calculations.
• Under this framework, a £60,000 salary would result in a tax liability of £11,499.80, determined as follows:
  

Principles of Taxation

• For a tax system to be accepted and complied with by the population, it needs to be perceived as 'good'.
• Several key principles should guide the development of a 'good' tax system:
• Simple: Taxpayers should have clarity on what, when, where, and how to fulfill their tax obligations.
• Fair (Equity): Taxes should be based on a taxpayer's ability to pay. Progressive taxation, for instance, seeks to achieve this by ensuring that the wealthy contribute more than the less affluent.
• Convenient: Systems for tax collection should be user-friendly and offer options for taxpayers, such as monthly installments or direct deductions from salaries by employers.
• Efficient: The government's management of the tax system should be cost-effective and devoid of unnecessary expenses.
• Fit for Purpose: A well-designed tax system should not have unintended consequences that discourage work or economic activity.
• Flexible: The tax system should be adaptable to changes in the economy, ensuring it can be adjusted as needed.

Impact of Taxation

Changes in tax rates, both direct and indirect, have a significant impact on various economic factors.

• When tax rates are altered, it creates ripple effects that are felt by households, businesses, and the overall economy.

Effects of Tax Rate Changes