Taxation
- Redistributes income from wealthy to poor
- Influences how resources are allocated among users
- Assists in regulating the economic fluctuations with the BTC
Terms
- IMPACT: where the tax is levied or collected
- INCIDENCE: where the burden of the tax falls or who pays the tax
Direct taxation
- Collected from taxpayers’ income
- Impact + incidence falls on the same person
Indirect taxes
- Collected from consumer spending
- Generally applied to goods and services as opposed to income or profits
- Ultimate burden of tax generally does not fall on the entity that pays the tax
- Levied on suppliers of goods and services, but the incidence of the tax generally falls on the end consumer through higher prices
- i.e. impact + incidence of tax falls on different people
Examples of indirect tax
-
E.g. GST, excise and customs equivalent, excise duties on the manufacture and importation of fuel, alcohol (excluding wine), tobacco, import tariffs
Progressive, proportional, regressive
- PROGRESSIVE: the rate of tax increases as income rises
- Claim increasing proportion of income as income rises
- Burden of tax largely on those who earn higher levels of income
- PROPORTIONAL: the rate of tax remains the same as income rises
- Takes constant proportion of income, not matter what level of income has been earned
- REGRESSIVE: the rate of tax falls as income rises
-
Place greater burden on lower income earners ← takes a decreasing proportion of income as income increases
-
GST
- GST: broad based tax levied at 10% of the price of most goods and services consumed in Australia
- Indirect
- The seller of the good or service pays the tax, but then passes it onto the consumer through higher prices
- The seller collects the tax, but it is actually paid by the consumer
- i.e. impact on supplier, but incidence falls on consumer
- Regressive
-
A GST tax levied at a flat rate of 10% on a good or service such as a box of chocolates
-
The low income earner will pay the same dollar value of tax on the chocolates as does the high income earner
-
To low income earner: tax is a higher proportion of their income
-
Personal income tax
- Direct
- Impact and incidence of the tax both fall on the same person
- Progressive
-
Marginal tax rates rise as income rises
-
People on a higher income pay more tax, both in terms of money and as a proportion of their income
-
Company tax
- Indirect tax
- The seller of the good or service pays the tax, but then passes it onto the consumer through higher prices
- The seller collects the tax, but it is actually paid by the consumer
- Impact falls on company
- Incidence falls on consumers ← tax is a cost of production that is passed on to buyers
- Proportional
-
Takes a constant proportion of income, not matter what level has been earned
-
All companies, irrespective of size of earnings, pays a tax at the rate of 30% of profit (over 10 mil
-
Macroeconomic objectives
- Sustainable economic growth (3-4%)
- SUSTAINABLE ECONOMIC GROWTH: rate of growth which can be maintained without creating other significant economic problems, especially for future generations, where the current rate of growth is not so fast that future generations are denied the benefit of scarce resources, such as non-renewable resources, and a clean environment
- ECONOMIC GROWTH: Increase in the output that an economy produces over a period of time; the increasing capacity of an economy to satisfy the material wants of the population
- Measured by calculating the rate of change in real GDP over a period of time
- GDP: the total market value of all final goods and services produced in a country during a period of time
- Low unemployment (full employment) – (4-5%, 0% cyclical)
-
FULL EMPLOYMENT: when everyone who is willing and able to work can find a job
-
However, due to frictional and structural unemployment, the natural rate of unemployment is 4-5%
-
UNEMPLOYMENT: where people who are willing and able to work are unable to find work
-
Measured by the unemployment rate
-
UNEMPLOYMENT RATE: proportion of the labour force who are willing and able to work but have not been employed in paid work for at least one hour in the week in which they were surveyed = Number unemployed/total labour force x 100%
- Low inflation (price stability) – (2-3% inflation rate)
-
PRICE STABILITY: when there is little change in the general price level, resulting in minimal fluctuations of GDP growth rate over a period of time in the BTC
-
INFLATION: persistent and appreciable rise in the general level of prices
-
Measured by the CPI: measure that examines the percentage change of the weighted average of prices of a predetermined basket of consumer goods and services by their importance
- A more equitable distribution of income (equity)
- A more equitable distribution of income ensures distributing welfare to ensure fairness and allowing members of the economy to have the same opportunity to accumulate wealth
- Measured by the Gini coefficient: which is the ratio between the area between diagonal and the Lorenz curve over the entire area under diagonal
- Where 0 is perfectly income equality where the total income in the country is evenly distributed among the population, while 1 is perfect income inequality, where a large proportion of the income is earned by a very small proportion of people