Personal Income Tax
Introduction to Chapter 13
What you should know for this chapter:
• Define comprehensive income tax base
• Explain the international principles of taxing income
• Explain why personal income tax base differs from the comprehensive
income tax base
• Explain progressivity in income tax and how it is achieved
• Economic effects of personal income tax
The Comprehensive Income tax base
There are 4 tax bases = income, wealth, consumption and persons
Income can be defined from:
• sources (revenue) side of personal budgets. OR
• uses (expenditure) side of personal budgets
Sources Side
- income includes anything that makes consumption possible
- salaries/wages, interest, capital gains, rent, profits, royalties,
dividends, gifts, employer pension contributions, unemployment
benefits, income in kind
Uses Side
- income includes consumption plus savings
- Y=C+S
- Income is therefore the net increase in the power to consume
during a period.
Haig- Simons Definition of income:
• Income measures a person’s ability to pay and purchasing power.
, • Income is recorded when it accrues- NOT only when its realized
• Eg) an increase in the value of an asset counts as income even before it is
sold
• Problem with accrual principle: cash flow problems- tax may be payable
before cash is actually received.
International Taxation of Income
There are 2 principles of international taxation…
1) Residence Principle (worldwide basis)
• Taxpayer pays tax in the country where they reside
• Residences are taxed on worldwide income
- Eg) A South African resident earns R300 000 in SA and R400 000 in
Zimbabwe
- \ Total taxable income in SA = R700 000
• Advantages
- Reflects ability-to-pay principle
- Allows progressive taxation on worldwide income
- Protects the tax base
• Disadvantages
- Administratively complex
- Can discourage multinational business
- Requires double taxation agreements
2) Source Principle
• Income is taxed where it is generated
• Using the previous example, only the R300 000 earned in SA is taxed in SA
• Advantages
- Reflects the benefit principle
- Neutral regarding imports (the tax neutrality principle implies that
the tax system should not influence locational decsions)
- Easier administratively for developing countries
• Disadvantages
- Residence may avoid tax on foreign income
- Weakens progressive taxation