Introduction to Taxation
INTRODUCTION TO TAXATION
Unlike most transfers, which are voluntary, taxation is compulsory.
That’s needed because of free-rider problem (no one will have injective to contribute)
Modern taxes are monetized (individuals provide just money)
Tariffs are taxes imposed on imported goods. Tariffs protect domestic producers.
Taxes can be divided to:
• direct • indirect
Direct taxes are individual income tax, payroll tax (used to finance social) security, corporation income tax (tax on net profit of corporations), tax on property.
Indirect taxes are custom duties on imported goods from abroad, exice taxes (telephone services, air travel, luxury commodities).
VAT (Value-added tax) are taxes on the difference of value of sale and value purchased.
Income tax makes a biggest percent in the tax revenue in the USA.
USA relies much more on the individual income tax, unlike EU countries which rely on VAT.
Five properties of a good tax system:
▪ efficiency (it should not be distortionary) ▪ administrative simplicity (low cost of administration and complexity) ▪ flexibility (easy adaptation to changing circumstances) ▪ political responsibility (it should be transparent) ▪ fairness (treating those in similar circumstances similarly)
Efficiency – Most taxes change relative prices, so the prices are distorted and the allocation of recourses is inefficient (windows tax in Britain in XVII century)
Behavioral effects of taxation – marriage, divorce, risk taking, saving.
Financial effects of taxation – Fringe benefits, financial structure of firms.
Organizational effects – Corporations vs unincorporated enterprises, banks vs insurance companies.
General equilibrium rate effect is that tax on income reduces saving and reduced saving are reducing capital. Reduced capital means reduced productivity of workers and their wages.
Announcement effects and impact affect also affect tax system.
Nondistortionary
Unlike most transfers, which are voluntary, taxation is compulsory.
That’s needed because of free-rider problem (no one will have injective to contribute)
Modern taxes are monetized (individuals provide just money)
Tariffs are taxes imposed on imported goods. Tariffs protect domestic producers.
Taxes can be divided to:
• direct • indirect
Direct taxes are individual income tax, payroll tax (used to finance social) security, corporation income tax (tax on net profit of corporations), tax on property.
Indirect taxes are custom duties on imported goods from abroad, exice taxes (telephone services, air travel, luxury commodities).
VAT (Value-added tax) are taxes on the difference of value of sale and value purchased.
Income tax makes a biggest percent in the tax revenue in the USA.
USA relies much more on the individual income tax, unlike EU countries which rely on VAT.
Five properties of a good tax system:
▪ efficiency (it should not be distortionary) ▪ administrative simplicity (low cost of administration and complexity) ▪ flexibility (easy adaptation to changing circumstances) ▪ political responsibility (it should be transparent) ▪ fairness (treating those in similar circumstances similarly)
Efficiency – Most taxes change relative prices, so the prices are distorted and the allocation of recourses is inefficient (windows tax in Britain in XVII century)
Behavioral effects of taxation – marriage, divorce, risk taking, saving.
Financial effects of taxation – Fringe benefits, financial structure of firms.
Organizational effects – Corporations vs unincorporated enterprises, banks vs insurance companies.
General equilibrium rate effect is that tax on income reduces saving and reduced saving are reducing capital. Reduced capital means reduced productivity of workers and their wages.
Announcement effects and impact affect also affect tax system.
Nondistortionary