Governments in several countries, including the UK, Spain, Ireland and Hungary, have increased their indirect tax rates in recent years. Assess the likely economic effects of such a tax increase in a country of your choice. (20 marks)
Indirect taxes are those imposed by a government on goods and services. There are many positive and negative implications of such a tax increase on both the consumer, producer and the government. There are two types of indirect taxes, specific and ad valorem. A specific tax is a set amount of tax per unit sold. For example a 60p tax on cigarettes. In contrast an ad valorem tax is a percentage tax based on the value added by the producer.
One of the positive economic effects of an increase in indirect taxes is that it may be an incentive to work, this would have positive implication for a country such as Spain who has the 26th highest unemployment rate at 22.7%. A higher VAT rate would cause a fall in real incomes. This could increase the incentives to work if people wish to maintain their standard of living. However indirect taxes can be regressive as taxes can fall more heavily upon the poor than on the rich as
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Ad valorem tax allows government revenue to automatically increases as the economy grows. This means that the tax rate does not need to be adjusted frequently, as in the case of specific unit taxes, such as duties on cigarettes and alcohol. Tax revenues would particularly increase if demand for the goods or services was price inelastic, so despite the increase in price consumers would opt to buy the good or service regardless, this causes tax revenues for the government to also increase. However the increase in indirect taxes could cause living standards to fall, particularly in countries such as Spain who already have such a high unemployment rate however wages may also increase in a response to an increase in
Lee, Y., & Gordon, R. H. (2005). Tax structure and economic growth. Journal of Public Economics, 89(5-6), 1027-1043. http://dx.doi.org/10.1016/j.jpubeco.2004.07.002
Government spending and taxes cause overall harm to economy because it would decrease individual spending and private consumption. Raising taxes on private consumption would only help fund public consumption and pay for government spending.
The United States tax system is in complete disarray. Republicans and Democrats agree that the current tax code is complex, unfair, and costly. The income tax system is so complex; the IRS publishes 480 tax forms and 280 forms to explain the 480 forms (Armey 1). The main reason the tax system is so complex is because of the special preferences such as deductions and tax credits. Complexity in the current tax system forces Americans to spend 5.4 billion hours complying with the tax code, which is more time than it takes to manufacture every car, truck and van produced in the United States (Armey 1). Time is not the only thing that is lost with the current tax system; Americans also lose great deal of money complying with the tax code. Resources that are currently wasted on record keeping, filing forms, learning the tax code, litigation, and tax avoidance. The cost of complying with the current tax code totals about $200 billion annually, or $700 for every man, woman, and child in America (Armey 1). The overwhelming consensus that the current tax system is inadequate has ignited the search for tax reform. There are numerous proposals for tax reform; one particular proposal brought forth by various conservatives is the idea of national flat rate income tax. The idea is to replace the current income tax with a single rate that everyone pays.
Tesco will be affected by direct and indirect taxation which in turn has impacts on business costs, on aggregate demand, and therefore on business revenues.
Taxes in the United States include payroll taxes, property taxes, sales taxes, and a multitude of others. These taxes may be imposed on individuals, business entities, estates, trusts, or other forms of organizations. In general, there is a lot of inquiry on the current tax system. With endless loopholes, a regressed economy, and corruption there has been widespread anger on the current structure of taxation. Consequently, the wealthy have managed to become even richer despite the economic crisis. Furthermore, many taxpayers in the upper class have found loopholes to avoid substantial taxation or otherwise known as tax evasion. (Stewart 2013) Tax evasion has only grown over the years and with the national debt has become a major issue. What is more, is the intense complexity of the entire taxation process. Addressing all the issues and problems regarding the taxation structure is a meticulous and arduous process. With this in mind, politicians from both parties have tried to address individual issues within the taxation paradigm. Being that the United States has the highest corporate tax in the globe, politicians have tried to change policy regarding taxation on businesses. (Sullivan 2013) How...
The government use of taxes plays a crucial role in today’s economy as well as personal finances, it has and will continue to leave its mark on the world we live in.
The increased and reduced levels of taxation have a direct effect on the state of the economy. A cut or reduction in tax rates in a country reduces the amount of taxes households remit to the government. The amount of remitted taxes depends on household income. This increases their disposable income. The increase disposal income enables households to spend some of this extra income on purchasing goods and services expanding companies supply rates or spend the income on investments, thus creating the supply for job opportunities and sometimes save the remaining income. Their increased spending leads to a larger consumption in the aggregate economy facilitating the circular flow of income. Companies that produce the much-needed goods and services for the increased demand have to subsequently increase their production. An increase in production to cater for the growing demand for goods and services may result in the supply for job opportunities increasing taxes remitted to the government. All these translates in the further increase of income levels and output in the economy. When the economy of a country expands, the amount of taxes paid to the government increases accordingly thus facilitating economic growth. However, if the demand for goods and services tend to cause prices to shoot
The four types of taxes this paper will discuss are income tax, sales tax, property tax, and user fees. Income tax was not permanently established until the 16th Amendment was passed in 1913. Most federal taxes had been previously derived from excise taxes on tobacco and alcohol and other consumer goods. The US Constitution, when written and still continues to, legitimize taxation in the United States through Article I, Section 8, that Congress has the power to lay and collect taxes, duties et al, pay the debts or provide for the common defense and general welfare of the United States (Cornell Law LII). Investopedia defines income tax as ‘a tax government(s) impose on financial income generated by all entities within their jurisdictions (Investopedia, 2014). Businesses and individuals are required to file an income tax return every year to determine if they owe taxes or qualify for a refund. That is determined by measuring the total income one earns to a designated tax rate, calculating one’s taxable income, which are some or all items of income reduced by other adjustments or expenses in that tax year. There are different subcategories of income tax; there is a federal income tax that is set by the federal government, apart from a few states, there is a state income tax that is imposed on their respective residents, as well as the possibility of there being local income tax ...
The financing and structure of a tax change are important to achieving economic growth. Tax cuts may inspire people to work and invest, but if tax cuts aren’t financed by fast spending cuts, they will likely result in an increased federal budget deficit. If this continues, the long-term impact will reduce national saving and interest rates will raise as a result. Base broadening measures, can remove the effect of tax rate cuts on budget deficits, but it also reduces the impact on saving, investments and labor supply which will impact growth. Another measure is reallocating resources across all sectors, this will increase the efficiency and possibly raise the size of the economy. Researchers and policy makers have been wondering how changes to the personal income tax system
The famous literature on principles of taxation was embodied in Adams Smith “Canons of taxation”. Since then, economies have adopted (and adapted where necessary) these basic principles for what is regarded as the most important tool of fiscal policy.
The use of taxes is one of the government's favorite ways to make its presence known in the economy. While this method seems blatantly obvious, many of the ways the government uses the money collected by taxation is not. Some of the money it takes is used to fund other programs designed to "protect" consumers and to "create" jobs. Be...
Indirect taxes are the taxes that are collected on products and administrations. A percentage of the noteworthy indirect taxes incorporate Value Added Tax, Central Sales Tax, Central Excise Duty, Customs Duty, stamp obligations and use charge.
However if only indirect taxes are implemented, the revenue could be useful to fund not only negative advertising, the consumers who wish to relieve the taxation burden could change to other uses to carry their groceries such as a shopping bag that can be used over many times.
Double taxation is always considered to be one of the most important issues in international taxation. With the more and more business moving towards globalization and cross-border investment, double taxation is often cited as a major obstacle to liberate economic progress.
Tax expenditures are popularly known as tax loopholes or tax breaks. It departures from the normal tax structure and ...