Sunday, January 24, 2010

Taxes are compulsory contributions imposed on individuals and firms to defray the expenses incurred by the nation

Impose taxes
--> revenue for govt
--> redistributes income
-->influence economic act
-->discourage consumption of demerit goods
--> discourage consumption of imports & hence protect domestic industries -tariffs

Qualities of good tax
equitable
convenient for tax payers
not effort hindering
taxes too high affect incentive to work. {big part of income etc}
economical
- cost of collecting taxes < revenue generated

Direct taxes
= progressive
=can redistribute income
->corporate tax
tax on profits of firm
->income tax
->inheritance tax

Indirect taxes
=regressive
=less effort-hindering. u spend, u pay.
->sales tax: GST
-> specific sales tax
taxed a fix amount. e.g. taxed a $5 no matter spend $10 or $100
use on demerit goods
producing disincentive as price makes supply curve shifts left.
->ad valorem tax
fixed % of price of goods. GST
discourages production. supply shifts left.


Impact of direct taxes
--> set too high = effort hindering as too big of income is being taxed = people reluctant to work.

-->redistributes income.
-->good source of revenue in countries with organised labour markets.

Impact of Indirect taxes
--> regressive, falls more heavy on the poor
--> increase in prices
--> may result in inflation

-->easy to collect, cannot be evaded
--> fewer disincentives, less effort hindering
--> can be imposed selectively on particular groups

Labels: taxes