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Taxation
A Tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent
of a state.Taxes consist of direct tax or indirect tax.
A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government [] a
payment exacted by legislative authority."
Purposes of Taxation
Financing government spending:
Taxes are justified as they fund government expenditure and activities that are necessary and beneficial to society.
Control Inflation
One of the causes of inflation is too much money chasing too few goods. Government can take away the extra
disposable income of the people through higher taxes and thus reduce the aggregate demand in the economy and
resulting in low inflation rate.
Balance of payments
Tariffs are taxes on imports. Government can correct an unfavourable balance of payment situation by increasing the
tariffs. This will result in imports becoming expensive and will cause a fall in demand for the imported goods.
Direct taxes
Taxes which are collected directly from income and wealth are known as direct taxes.
Corporation tax
This tax is levied on profits earned by companies. It is a proportional tax which is levied at the constant rate.
Property Tax
Many countries have Property tax, or millage tax. It is the tax which the owner pays on the value of the property being
taxed.
The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed
in proportion to that value. Forms of property tax used vary between countries and jurisdictions.
Stamp duty
Stamp duty is a form of tax that is levied on documents relating to immovable property, stocks and shares. Apart
from transfers of shares and securities, stamp duties are also charged on the issue of bearer instruments and certain
transactions involving partnerships.
ndirect Taxes
Indirect tax (such as sales tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an
intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the
customer). The intermediary later files a tax return and forwards the tax proceeds to government with the return.An
indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the
products.
Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the
manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form
of a higher price. Thus, an indirect tax is such which can be shifted or passed on.
All Indirect Taxes are regressive in nature. The poor will feel the pinch more than the rich.
Excise duties
Excise duty is a type of indirect tax charged on goods produced within the country. Lists of such goods are readily
provided by governments.
Economy - Taxation
Author: Jim Riley Last updated: Sunday 23 September, 2012
External Environment: Government Taxation
There are some key reasons why government needs to levy taxes; the main ones are:
Market failure and environmental targets taxes may help correct market failures (e.g.
pollution)
Examples:
Income Tax
Corporation Tax
Who pays?
Capital Gains Tax
The effects of the main types of taxation on businesses (in the UK) can be summarised as follows:
Tax
Levied on
Impact
Income &
National
Insurance
Income
Corporation
Business profits
VAT
Spending by
households
Capital gains
On profits from
shares