5.

Taxation

I. Introduction to the topic


The main function of taxes

Tax is a payment of money legally demanded by the government. Taxes are the most
important revenue sources of the state. The main function of taxes is to cover the
governments expenditures. There is a wide range of goods and services which are provided
by the government from taxes (e.g. national defence, security, education, welfare, basic
economic services, housing).

Types of taxes

Taxation on individuals or companies, which is made directly by them or through their
employer is called direct taxation. Direct taxes are progressive, which means that they fall
most heavily on the well-to-do. Examples of direct taxes are: personal income tax,
corporation tax, local business tax, capital gains tax, inheritance tax and wealth tax.
Personal income tax
Personal income tax is levied on an individuals net income. This is the sum of his total
earnings reduced by the amount of exemptions and deductions to which each taxpayer is
legally entitled. In Britain taxpayers file their tax returns to the Inland Revenue. The actual
tax liability is calculated from the appropriate tax schedules. In each schedule there is a zero
bracket amount which means that income up to that amount is taxed at a zero tax rate.
Currently there are two tax rates in Hungary.

Indirect taxes are levied on turnover and consumption. They are regressive, so they fall
most heavily on the lower paid. Examples of indirect taxes are VAT, excise duty, customs
duty.

Tax evasion

The higher the tax rates are, the more people are tempted to cheat. Lots of people have
undeclared cash-in-hand jobs on which no one pays any tax or national insurance.

Tax avoidance

To reduce income tax liability some companies give employees perks instead of taxable
money. Legal ways of avoiding tax are known as loopholes in the tax laws.
Multinational companies often set up their head offices in tax havens such as the Bahamas.
Life insurance policies and pension plans are known as tax shelters.








Vocabulary exercises based on the introductory text

A. Match the words and phrases in the left-hand column with their equivalents in the
list opposite

1. personal income tax a. tables used for calculating tax
2. corporation tax b. tax paid at each point of exchange of goods or services
3. local business tax c. tax levied on particular products
4. capital gains tax d. tax levied on the profits of companies
5. wealth tax e. tax paid by individuals on their earnings
6. tax schedules f. range that incomes fall into
7. bracket g. tax paid by individuals on their property
8. value added tax h. tax paid by companies to the local authority
9. excise duty i. tax levied on imports
10. customs duty j. tax you pay when you sell an asset



B. For each word or phrase listed below, find in the text a word or phrase similar in
meaning

1. collected
2. submit tax declarations (three words)
3. responsibility to pay tax (two words)
4. actual tax to be paid, expressed as a percentage (two words)
5. trying in an illegal way to pay less tax (two words)
6. trying in a legal way to pay less tax (two words) ...
7. benefits provided by a company (e.g. company cars) ...
8. legal ways to avoid paying tax
9. places with very low rates of tax (two words)
10. investments which enable tax payment to be postponed (two words) .





II. Hungarian text
Exercise 1
Cover the English words and expressions given in the footnotes and try to guess the English
equivalents of the underlined parts of the Hungarian text.

Exercise 2
After checking your guesses against the footnotes, give an oral summary of the text in
English.
Radiklis amerikai adreform?
Vilggazdasg
Cstrtkn tartja kvetkez lst
i
az amerikai adreform elksztsre
ii
letre hvott
elnki tancsad testlet
iii
. A jlius 31-ig elterjesztend javaslatban
iv
nagy
valsznsggel szerepelni fog a szvetsgi forgalmi ad
v
bevezetse.
Valsgs adparadicsomot
vi
grnek a trvnyhozs
vii
mindkt hzt ural
viii

republiknus trvnyhozk
ix
, akik forgalmi ad kivetsvel
x
fedeznk a kzterheket
xi
.
Egyes nyilatkozatokban
xii
mr elre nneplik
xiii
az tlls
xiv
sikert, mert - mint rvel-
nek
xv
- a jvedelmek
xvi
helyett a fogyaszts megadztatsa
xvii
elkerlhetetlenl fokozott
takarkossghoz
xviii
s felhalmozshoz
xix
, ennek rszeknt a beruhzsok
xx
s a nve-
keds fellendlshez vezet
xxi
.
A CNN olyan greteket idz
xxii
, hogy a fisklis
xxiii
technikai korrekci nyomn
xxiv
meg
lehet szntetni
xxv
a szvetsgi jvedelemadt
xxvi
, a vllalati nyeresgadt
xxvii
, a
tkenyeresg
xxviii
adjt s az ingatlanadt
xxix
. Vrmesebb vrakozsok szerint
xxx
a
brarnyos
xxxi
munkanlklisgi
xxxii
s trsadalombiztostsi terhek
xxxiii
is kiiktathatv
vlnnak, az AP szerint pedig akr az rksdsi ad
xxxiv
is nlklzhet lesz.
Az "lj szernyen
xxxv
, fizess kevesebb adt" elvhez
xxxvi
fztt vrmes remnyek
xxxvii

azonban valsznleg koraiak. Egyes szakrtk ugyan azt lltjk
xxxviii
, hogy a
szvetsgi kormny ltal vente
xxxix
adk formjban beszedett ktezer millird
xl

dollrnyi sszeg behajthat
xli
a forgalmi szfra megadztatsval, a szmtsok
xlii
azon-
ban ms mutatnak. Az tlet tmogati
xliii
szerint 23 szzalkos szvetsgi kulcsot
kellene alkalmazni
xliv
, a brlk
xlv
szerint azonban 30 szzalk lenne a tnyleges
xlvi

kulcs. A jelenlegi tervek csak eladsi adrl" (sales tax) szlnak, gy azt mg nem
lehet tudni, hogy az Eurpban szoksos tbbfzis vltozat
xlvii
(fa
xlviii
, pontosabban
hozzadott rtk-ad
xlix
) lenne-e bevezetve.
A terv ellen mris tiltakoznak a kiskereskedk
l
, akik - gymond - nem akarnak az
orszg adszediv
li
vlni. Ellenzik az elkpzelst
lii
a demokratk is, akik szerint
arnytalanul nagy teher
liii
hrulna a kiskeresetekre
liv
, akik a fizetsk igen nagy rszt -
ha nem az egszt - knytelenek ltfenntartsi kiadsokra
lv
klteni

III. English text
Collateral damage
Taxing the foreign rich
The Economist, 13 December 2007

1. For years, as chancellor of the exchequer, Gordon Brown dithered over what to do about
rich foreigners living in Britain untaxed on their offshore wealth. Spurred by a Tory plan to
clobber them, Alistair Darling, who now runs the Treasury, introduced tax changes that will
bring in 650m ($1.3 billion) a year.
2. But there is a genuine worry about damage to the economy. This risk is the main reason
that the government has dragged its feet for so long over reform, as it has wrestled with a
trade-off between tax equity and economic harm.
3. Unlike other taxpayers, rich foreigners living in Britain can shelter their offshore wealth
from tax. They do so by claiming non-domiciled status, asserting a longstanding
connection with another country. This allows non-doms to avoid being taxed on overseas
earnings and capital gains on assets held offshore, unless they remit income and gains to
Britain. Their favoured status offends against a cardinal principle of tax equity: that taxpayers
who have the same income (from wherever it is derived) should pay the same tax.
4. On the other hand, as the Treasury paper lays out, non-doms, who include shipping
tycoons and City high-fliers, pack an economic punch much weightier than their number,
currently around 115,000. Their average earnings in Britain, on which they do pay tax, exceed
100,000. As a result, they contributed taxable income of 12 billion to the economy in 2005-
06 and paid income tax worth 4 billion.
5. The danger in imposing a draconian tax regime on non-doms is that many of them may
pack their bags and go elsewhere. That could harm the economy and lead to a loss in domestic
tax revenues. Aware of the risk, Mr Darling is sweetening the tax pill. From next April, non-
doms will face an annual levy of 30,000 to retain their status. This will apply only to those
who have been in Britain for more than seven out of the past ten years, however.
6. The government is not wrong to tighten taxation of non-doms, but it needs to temper their
tax privileges cautiously. The economy needs to keep attracting footloose, smart, rich foreign
workers in order to thrive.
1769n

Important terms

collateral damage the unintentional damage caused by a singular action (e.g.
if rich foreigners are taxed too heavily, the economy will suffer)

offshore wealth money/assets that foreigners keep in a different country
from the one they live in

tax equity fairness in paying taxes

non-domiciled taxpayers(non-doms) foreign residents who maintain a
permanent address in a country other than the one in which they
live

capital gains profit made from assets sold

remit (income) transfer, send

levy a tax that non-doms will have to pay on their offshore income/assets

Extended vocabulary

dither over sg: be indecisive about sg
clobber: come down hard on
dragged its feet (idiom): been deliberately slow or reluctant to act
trade-off: compromise
cardinal principle: most important or fundamental principle
high-fliers: people who are ambitious and successful in their careers
pack a punch (idiom): have a powerful effect or influence
footloose (foreigners): highly mobile, free to travel when they want and do as they please


Comprehension questions

1. What group of people in Britain is the Treasury targeting with tax changes, and why?



2. Who is encouraging the Treasury to tax rich foreigners?



3. Why has the government been reluctant so far to tax the offshore assets of rich foreigners?



4. What is the specific dilemma that the government is struggling with?



5. In what way are rich foreigners living in Britain treated differently from British nationals?



6. What is the basis of this tax exemption for foreigners?



7. What is the basic principle of tax fairness that non-domiciled status violates?



8. What reason has the Treasury given for treating these rich foreigners differently?



9. What is the danger in forcing these non-doms to pay taxes on offshore income?



10. How is the government planning to make this new tax change more acceptable to rich
foreigners?



IV. Discussion questions

A. Discussion questions related to the article

1. Do you think its fair that rich foreigners without resident status should be required to pay
the same tax on their offshore income as national residents do on their locally-earned income?
Give reasons.


2. If you were the government, how would you compromise between tax equity (making sure
rich foreigners pay fairly) and economic harm to your country (the risk of losing money
because rich foreigners might leave)?


B. Additional discussion questions


1. What are some of the ways in which tax can be avoided or evaded?

2. What sort of taxation policy should the government adopt that provides taxpayers
(businesses and individuals) with the incentive to pay taxes, rather than to evade them?

3. What is your opinion about tax havens: are they ultimately a healthy part of globalization or
do they rob governments of tax revenues? Give reasons.


V. Role-play


9. Male or female manager?

Student:
Your companys new policy is to increase the number of female managers. As a member of
the board, you support this policy but you are afraid about the potential reaction from your
biggest customers, who prefer working with male managers. You are meeting with another
board member to discuss this issue.

Examiner:
You are a board member of a company that is seeking to bring more women into management
positions. You are against such a policy because you feel that men in general are more
respected as managers than women are. You meet to discuss this issue with another board
member, who thinks differently.


10. Financing start-ups

Student:
You are apprenticing as an investor. Your company provides finance for start-up companies
which need capital to develop their business. You are preparing for your first interview with
an entrepreneur who needs about 2.5 million to launch his new magazine. What questions
will you ask this entrepreneur before you decide to invest in his project? You are talking with
your trainer.

Examiner:
You are a senior investor responsible for the training of young graduates apprenticing as
investors at your company. You want to know what questions your apprentice investor will
ask his client at the interview.








i
hold a session
ii
preparation
iii
Presidents Advisory Panel
iv
motion to be tabled
v
federal turnover tax
vi
genuine tax haven
vii
legislature
viii
ruling
ix
legislators
x
levy
xi
fund public expenditures
xii
statements
xiii
celebrate
xiv
transition
xv
argue
xvi
incomes
xvii
taxing consumption
xviii
frugality
xix
accumulation of capital
xx
investments
xxi
lead to a boom
xxii
cites
xxiii
fiscal
xxiv
as a result of
xxv
it will be possible to eliminate
xxvi
income tax
xxvii
corporation tax
xxviii
capital gains tax
xxix
property tax
xxx
according to more sanguine expectations
xxxi
wage-related
xxxii
unemployment
xxxiii
social security burdens
xxxiv
inheritance tax
xxxv
modestly
xxxvi
principle
xxxvii
hopes attached to
xxxviii
experts claim

xxxix
annually
xl
billion
xli
collectable
xlii
calculations
xliii
supporters
xliv
federal rate should be applied
xlv
critics
xlvi
actual
xlvii
multiphase version
xlviii
general turnover tax
xlix
value added tax
l
retailers protest
li
tax-collectors
lii
oppose the idea
liii
disproportionately large burden
liv
would fall on the low-paid
lv
cost of living