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
Hall, A. (2001, August). The Flat Income Tax and the Fair Tax Consumption Tax: A
Business Source Premier. Web. 19 Jan. 2014. Stokey, Nancy L., and Sergio Rebelo. "Growth Effects Of Flat-Rate Taxes." Journal Of Political
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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 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...
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
An increase in government spending or a reduction in net taxes is always aimed at increasing aggregate output (Y). The main aim is to stimulate the economy but this may lead to many problem such as inflations, budget deficit because of needed debt to finance the deficit. Before finding out which is the better options for stimulation of any economy we need to first be clear with the concept of multiplier.
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.
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
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
This expansion can be a one-time increase in the economy’s size, that will not affect the future growth rate. A boost in aggregate demand can raise GDP and help the actual GDP align with the potential GDP. The income tax’s role in revenue generation, it effects on a variety economic activities and its impact of the distribution of after tax income will affect the long term fiscal status of the government. Tax policies can influence economic choices and tax cuts will eventually lead to a bigger economy in the long run. Cutting taxes would raise the amount of income into each household and raise the amount saved or invested. Tax cuts that are financed by immediate cuts in nonproductive government spending can raise the output, but tax cuts financed by reductions in government investment could reduce output. If tax cuts aren’t financed by spending cuts it may lead to an increase in federal borrowing, which will reduce long term growth. Evidence has suggested that tax cuts that are financed by debt for a long period of time will have no positive impact on the long term growth or could reduce growth all
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.
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.
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.