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1:10 AM
Davis Drengers
Mr. Polis

The definition of taxes are - required payments of money from individuals, firms and households to government that are used to provide public goods and services for the benefit of the community as a whole. Taxes are the main income for the government.

Reasons for taxes:
Taxes are the main income for the government. Taxes covers government expenditure (We know that government provide country's wealth with many social benefits like child care support, pensions, free medical help for children and many others. Government also pays for road infrastructure, lighting on the streets and so on. So we can see where the majority of taxes goes)
To correct market failure (Governments can intervene in individual markets by changing taxes and this changing demand. Government might add VAT-value added taxes for some products, so then taxation becomes a way of increasing economic efficiency)
To regulate imports and exports (Taxes on imported good, tariffs, may be imposed to reduce the consumption of imported goods)
Variations between distribution of income (For example if government uses progressive taxation system, then most likely the distribution of income will decrease, but if the government uses proportional taxation system then this gap doesn't decreases, infect it might increase)
To keep economy together so it doesn't break down ( By taxation system government can operate with country's economy, control unemployment and inflation)

Mainly taxes are on income and goods n' services. Direct taxes are taxes that are aimed on people income and firms profits, however indirect taxes (expenditure taxes) are aimed at goods and services. Explanation of direct and indirect taxes:
''Direct taxes are taxes imposed on peoples income and forms profits. The income from households comes in various forms such as employment income and interest on savings and dividends from the ownership, while some in charged based on the annual ''tax return'' form that people are usually obliged to fill out. By definition these taxes are unavoidable, because households and firms are obligated to declare their full income to governments and pay taxes on it accordingly'' (Economics book, chapter 22)
Indirect taxes are taxes that consumer who buy the good pay the tax on seller, or producer, who then pays the tax to the government. In a sense these taxes are avoidable, as consumer have the choice as to wether buy the good or not to, and in what quantities. Government varies the rate of indirect tax than they charge on as food at the supermarket, being charged a lower tax rate than of luxury goods, such as restaurants. (Economics book, chapter 22)

There are three different taxation categories into which we can put these two types of taxes. They are progressive taxes, regressive taxes and proportional taxes. Progressive and proportional taxes are for direct taxes, because they are income taxes and regressive taxes are for indirect taxes, because they are aimed to goods and services.
Direct taxes
Progressive taxation system means that as income rises, people pay a higher % proportion of this income taxes. Usually there is certain amount of income that is non-taxed, so a person earning a low income might pay no taxes at all, however, when the income moves beyond the minimum then person need to pay a certain amount of his income into taxes. However tax rate for this person is calculated only from that value of money which is beyond the minimum, so if he earns $10'000 per year and $8000 are non-taxed, then he needs to pay a certain % of his money into taxes only from these $2000. So we can see that this system helps to reduce the distribution of income. This system is really complicated because, governments are responsible for saying what amount on income are no-taxed and how many percentages there will be at certain level of income.
Proportion taxation system means that the proportion of income paid in taxes is constant for all income levels, so the same personage of taxes is paid for all income levels. Many countries want this taxation system. There are some reasons for that like all the other taxation system are very complicated and the possible disincentive effects of taxes on working.
Indirect taxes
Regressive taxes is know as a regressive tax if the proportion of income paid in taxes falls while income rises. The best way of explaining this system is by example. So if person buys a computer and tax on computer is $100 then person who earns $1000 per month will spend 10% of his income in taxes, while person whit income 5000$ per month will spend only 2 percent of his income. The tax is regressive because a higher proportion of income is paid at lower levels of income.

In conclusion I would say that every taxation system has there pluses and minuses and make the decision which one to choose is difficult because country's government needs to consider country's economical development and social aspects in the country.

Category: IB2 Economics | Views: 438 | Added by: ddrengers | Rating: 0.0/0
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