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
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...
Nevertheless, there are benefits that come from taxation. Given that government has its hand in so many affairs, it can reduce the opportunity for monopolies, and colluding oligopolies. Also, government can reduce the copious amounts of pollutions moneygrubbing corporations put out in the forms of air, ground, and water. Of course, this increases costs for production, and increases rates or prices for the consumer, costing
Businesses and individuals have suffered at the difficulties and costs of complying with the income tax. There are many other ways a government can collect taxes, the income based tax
According to the Quarterly Report of Tax Policy and Administrative Reform Project, published by the USAID, “Development Alternatives Inc. (DAI) and its Tax Policy and Administration Reform (TPAR) team to design and implement a program for modernizing and improving tax policy and administration in El Salvador.” DAI’s aspiration in helping El Salvador prosper reflected off the Quarterly Report assertions that, “The TPAR project is working with the DGII to help them achieve their targets for the tax administration: Increase tax revenues equivalent to 2.5-3.0% of GDP by 2009… 50% reduction in tax evasion and avoidance in VAT, income tax, and excise tax.” In order to achieve their goal of fostering economic growth, a group of Salvadoran leaders and leaders collaborating with El Salvador prepared the following objectives for late 2008, “ Build the capacity and systems required to achieve the MOF’s ambitious revenue targets; Establish the impartial transparent, and rigorous procedures necessary to reduce tax evasion; and strengthen the analytical abilities necessary for the DGII to gauge the fiscal impact of current law and proposed reforms and to serve as an ongoing source of expert advice to senior policy makers.” From such objectives, the government's actions in decreasing withheld tax rates effectively fostered economic growth. Source C reflects how
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
After analyzing the data and the theory, we have provided our conclusion weather tax cut is better for the stimulation of growth or Government spending is? This report explains the big macroeconomic debates of the present times. It seeks to explore the debate within fiscal policy itself between tax cuts and government spending. We have tried to explain the argument through some theories and through some data collected from Indian econ...
An important point to consider in any tax system is the responsiveness of the tax revenue to changes in income. According to Mansfield (Majuca, 1998), this responsiveness is measured by the concepts of tax elasticity and tax buoyancy.
Value Added Tax or VAT as it is called is the most common alternative strategy implemented by many countries to deal with inefficiencies within the tax system. VAT provides an opportunity to modernize the indirect tax system, to make it more efficient, appropriate and simpler.
Dissimilar to Direct Taxes, Indirect Taxes are not collected on people, but rather on merchandise and administrations. Clients in a roundabout way pay this duty as higher costs. Case in point, it can be said that while acquiring products from a retail shop, the retail deals tax is really paid by the clients. The retailer inevitably passes this duty to the particular power. The circuitous tax, really raises the cost of a decent and the clients buy by paying more for that item.
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.
The Canons of Taxation is associated with the tax rate, method and its collection. A better way to define canons of taxation is the properties or features possessed by a good tax. These features are recognized as canons of taxation only if applied to a solitary tax. The mixture of different taxes with different canons included is deemed a good tax system. Hence, canons of taxation are used by the governments to collect and impose taxes. The process of taxation increases government income but there is also a downside to it. The government’s investment might be affected in a negative way. A balanced strategy should be developed by the government before the socioeconomic activities in the country are badly affected by the aftereffects of taxation.
Oliver Wendell rightly said - “I like to pay taxes. With them, I buy civilization.” True indeed. With the practice of paying taxes, you not only show yourself as a responsible citizen towards country, but you are contributing some portion of your income towards the betterment of the nation.Government has various policies and to get them operational in the system funds are required. These financial resources are earned in the form of taxes from the residents of the country. Hence taxes come into being and they are classified into 2 basic categories, i.e. Direct and Indirect. VAT is an example of Indirect taxes imposed on buyers.
When taxes such as excise taxes and indirect taxes such as VAT are placed by the government, the government takes into account the price elasticity of demand of a product and the response of the consumer if price were to rise. The tax burden depends on the price elasticity of demand to establish of whom is to take majority of the burden. When price elasticity of demand is inelastic, the consumer will take majority of the tax burden. Tax incidence falls on the group that responds the least to price and has the most inelastic curve. The tax burden can possibly be split evenly between producer and consumer, by the decision of the producer. This occurs if the producer predicts the consumer will not respond well to a product’s rise in price, making the product now elastic and the majority of the burden would be placed on the producer. To resolve this matter, the producer pays a percentage of the tax burden and the consumer the remainder. However, if a product has an inelastic demand such as fuel and cigarettes, an excise tax that focuses on these individual products is used. Businesses determine price with the use of price elasticity of demand. If a business were to increase the price of an elastic good, it would be more affected than increasing an inelastic good. Consumers would stop spending money on
Taxation is one of the most important forms of public revenue for countries. Its theory is of great importance among the theories used in public finance. It also plays an important role in contributing to the attainment of the goals of fiscal policy. Therefore, many concepts and definitions related to taxation have emerged, and individuals are obliged to pay their value free of charge to assist States in achieving societal goals. Other definitions are contributions of a monetary or in-kind nature, provided by individuals to the States in which they live, whether they receive benefits Public services or not, states impose such taxes to association with economic goals, political and financial.