IGCSE economics (0455)
Unit 5.2 Taxation
Financing public expenditure
Þ As public expenditure rises a government must raise more
revenue to pay for it, can be done by:
Þ Borrowing money from the private sector
Þ Interest payments on government loans to private sector
firms and overseas governments
Þ Taxes on income, wealth, and expenditures
Þ Proceeds from the sales of state-owned entities
The proportion of tax taken from the national income of an
economy measures the total tax burden in that national
economy
Individuals and firms also have personal or corporate tax
burdens measured by the amount of tax they each must pay as
a proportion of their taxes
Tax evasion and avoidance
Þ Taxes are compulsory payments backed by laws. Non-
payment of tax or tax evasion is a punishable offence
Þ Although some taxes can be avoided legally
Þ Taxes can:
Þ raise revenue to fund public expenditure
Þ are used to manage to macroeconomy
Þ can reduce inequalities in income
Þ Can discourage spending on imported goods
Þ Can discourage the consumption of harmful products
Þ Can be used to protect the environment
Þ Should be designed with the following in mind:
1. Equity – taxes should be fair – taxpayers with similar
levels of income must be taxed in a similar way
2. Non-distortionary – taxes used to raise revenue should
not affect or distort sensible economic behavior
, 3. Certainty – tax rates should be relatively stable
4. Convenience
5. Simplicity
6. Administrative efficiency
Tax systems
All taxes in a country
Need to decide if they want a progressive, regressive, or
proportional tax.
Þ Progressive
Þ The proportion of income taken in tax rises as income
rises. People with higher incomes will be taxed more
Þ Regressive
Þ The proportion of income paid in tax falls as income rises
Þ Proportional
Þ Takes the same proportion of income whatever the level
of income
Direct taxes
Þ Are taken directly from individuals or firms and their
incomes. The burden of the tax falls directly on the person
that must be paying it. For example: income taxes, capital
gains tax
Personal income tax
• Is a tax payable from an individual’s earnings usually on a
pay as you go basis
• In many countries tax is levied as progressive tax
• Higher marginal tax rates (the amount of additional tax
paid for every additional dollar earned as income) are
applied to those with higher income
• People earn a certain amount that is tax free (personal
allowance)
Unit 5.2 Taxation
Financing public expenditure
Þ As public expenditure rises a government must raise more
revenue to pay for it, can be done by:
Þ Borrowing money from the private sector
Þ Interest payments on government loans to private sector
firms and overseas governments
Þ Taxes on income, wealth, and expenditures
Þ Proceeds from the sales of state-owned entities
The proportion of tax taken from the national income of an
economy measures the total tax burden in that national
economy
Individuals and firms also have personal or corporate tax
burdens measured by the amount of tax they each must pay as
a proportion of their taxes
Tax evasion and avoidance
Þ Taxes are compulsory payments backed by laws. Non-
payment of tax or tax evasion is a punishable offence
Þ Although some taxes can be avoided legally
Þ Taxes can:
Þ raise revenue to fund public expenditure
Þ are used to manage to macroeconomy
Þ can reduce inequalities in income
Þ Can discourage spending on imported goods
Þ Can discourage the consumption of harmful products
Þ Can be used to protect the environment
Þ Should be designed with the following in mind:
1. Equity – taxes should be fair – taxpayers with similar
levels of income must be taxed in a similar way
2. Non-distortionary – taxes used to raise revenue should
not affect or distort sensible economic behavior
, 3. Certainty – tax rates should be relatively stable
4. Convenience
5. Simplicity
6. Administrative efficiency
Tax systems
All taxes in a country
Need to decide if they want a progressive, regressive, or
proportional tax.
Þ Progressive
Þ The proportion of income taken in tax rises as income
rises. People with higher incomes will be taxed more
Þ Regressive
Þ The proportion of income paid in tax falls as income rises
Þ Proportional
Þ Takes the same proportion of income whatever the level
of income
Direct taxes
Þ Are taken directly from individuals or firms and their
incomes. The burden of the tax falls directly on the person
that must be paying it. For example: income taxes, capital
gains tax
Personal income tax
• Is a tax payable from an individual’s earnings usually on a
pay as you go basis
• In many countries tax is levied as progressive tax
• Higher marginal tax rates (the amount of additional tax
paid for every additional dollar earned as income) are
applied to those with higher income
• People earn a certain amount that is tax free (personal
allowance)
