Government budget and Taxes

• Direct taxes: these take money directly from people’s incomes or from companies’ profits,– Income tax – payable on income– Corporation tax – paid by companies on their

profits– National Insurance contributions – these are paid

by individuals– Petroleum revenue tax which is charged on the

net incomes on North Sea fields

• Property taxes– Inheritance tax – paid when money is inherited– Capital gains tax – paid when an asset increases in

value and is sold for more than it was bought for– Council tax – this is a local tax paid by households

and set by the local government in each area• Indirect taxes: these are paid when goods and

services are bought,– Value Added Tax (VAT)– Tax on tobacco– Excise duties on alcohol

Receipts

• Individual income tax– income from: wages, interest on savings,

dividends from corporations in which it owns shares, profits from any small businesses it operates

• Payroll taxes (social insurance taxes) – is a tax on the wages that a firm pays its workers.– Social Security and Medicare for elderly

• corporate income tax.– Based on profit - the amount the corporation

receives for the goods or services it sells minus the costs of producing those goods or services.

– taxed twice: when the corporation earns the profits; and pays dividends to its shareholders.

• “Other” - excise taxes: gasoline, cigarettes, and alcoholic beverages, also includes estate taxes and customs duties.

Spending• A transfer payment – is a government payment not made in exchange

for a good or service.• National defense.– salaries of military personnel and the purchases of

military equipment such as guns, fighter jets,

• Income security– Transfer payments to poor families and the

unemployed.– Temporary Assistance for Needy Families– Food Stamp program, which gives poor families

vouchers that they can use to buy food.– A third program is unemployment compensation,

which provides income to people who have recently lost their jobs.

• Medicare– government’s health plan for the elderly.

• Health spending– Medicaid, the federal health program for the poor, and

spending on medical research,

• Net interest. – When a person borrows from a bank, the bank requires

the borrower to pay interest for the loan. The same is true when the government borrows from the public.

• “other” – – many less expensive functions of government: the

federal court system, the space program, farm-support programs, housing credit programs, as well as the salaries of members of Congress and the president.

• budget deficit - an excess of government spending over government receipts

• budget surplus- an excess of government receipts over government spending

Tax System

• A tax is progressive if its average rate increases as income increases. Such a tax claims not only a larger absolute (dollar) amount but also a larger percentage of income as income increases.

• A tax is regressive if its average rate declines as income increases. Such a tax takes a smaller proportion of income as income increases. A regressive tax may or may not take a larger absolute amount of income as income increases.

• A tax is proportional if its average rate remains the same regardless of the size of income.

Question

• Which characteristics should have the good tax system?

A good tax system should• Have horizontal equity – people in the same

circumstances pay the same amount• Have vertical equity – taxes should be fair in

terms of rich and poor• Be cheap to administer• Be difficult to evade; convenient to pay• Be easily understood by the taxpayer• Have limited disincentive effect, e.g. should

not discourage people from working