PUBLIC FINANCE
Measures to finance public expenditure
Taxes : Taxes are imposed by the government to raise public revenue. There are two types of taxes that is direct and indirect taxes.
National Insurance Contributions: These contributions from both employers and employees are paid in to National Insurance Fund, and are used to pay national insurance benefits such as unemployment benefits.
Public borrowing: It borrows money by selling long term and short term securities and also by obtaining loans from the banks and overseas.
Selling assets: The government also raises the revenue by selling assets and other securities.
Why do Government impose taxes./ Aims of taxation.
To raise revenue to the government.
To raise the price and reduce the consumption of harmful products.
To reduce inequalities in the distribution of income and wealth.
To discourage imports and protect home industries from foreign competition.
To solve balance of payment problems.
To pay for public goods and merit goods.
The Structure of Taxation
Progressive taxation
In a progressive tax system, tax rate increases according to the increase in income. It takes a greater percentage of the income of the rich.
Income ($) Tax Rate (%) Tax Payable ($)
10 000
20 000
30 000 10
20
30 1000
4000
9000
Regressive Taxation
In a regressive tax system, tax rate decreases according to the increase in income. It takes a greater percentage of the income of the poor.
Income ($) Tax Rate (%) Tax Payable ($)
10 000
20 000
30 000 30
20
10 3000
4000
3000
Proportional Taxation
In a proportional tax system, tax rate remaining the same whatever may be the level of income.
Income ($) Tax Rate (%) Tax Payable ($)
10 000
20 000
30 000 10
10
10 1000
2000
3000
Impact of tax
The impact of tax is on the person who pays it firstly.
Incidence of tax
The incidence of tax is on the person who suffer the tax burden finally.
Direct Taxes
These are the taxes imposed on income and wealth of individuals and also on the profits of the companies. In this tax, tax burden cannot be shifted from one person to another. So the impact and incidence will be on the same person.
Eg: Income tax, Corporation tax etc
Indirect taxes
Indirect taxes are the taxes on spending on goods and services. Indirect taxes, tax burden can be shifted, the impact is on one person and incidence up on another.
Eg: Value Added Tax, Customs duties etc
Measures to finance public expenditure
Taxes : Taxes are imposed by the government to raise public revenue. There are two types of taxes that is direct and indirect taxes.
National Insurance Contributions: These contributions from both employers and employees are paid in to National Insurance Fund, and are used to pay national insurance benefits such as unemployment benefits.
Public borrowing: It borrows money by selling long term and short term securities and also by obtaining loans from the banks and overseas.
Selling assets: The government also raises the revenue by selling assets and other securities.
Why do Government impose taxes./ Aims of taxation.
To raise revenue to the government.
To raise the price and reduce the consumption of harmful products.
To reduce inequalities in the distribution of income and wealth.
To discourage imports and protect home industries from foreign competition.
To solve balance of payment problems.
To pay for public goods and merit goods.
The Structure of Taxation
Progressive taxation
In a progressive tax system, tax rate increases according to the increase in income. It takes a greater percentage of the income of the rich.
Income ($) Tax Rate (%) Tax Payable ($)
10 000
20 000
30 000 10
20
30 1000
4000
9000
Regressive Taxation
In a regressive tax system, tax rate decreases according to the increase in income. It takes a greater percentage of the income of the poor.
Income ($) Tax Rate (%) Tax Payable ($)
10 000
20 000
30 000 30
20
10 3000
4000
3000
Proportional Taxation
In a proportional tax system, tax rate remaining the same whatever may be the level of income.
Income ($) Tax Rate (%) Tax Payable ($)
10 000
20 000
30 000 10
10
10 1000
2000
3000
Impact of tax
The impact of tax is on the person who pays it firstly.
Incidence of tax
The incidence of tax is on the person who suffer the tax burden finally.
Direct Taxes
These are the taxes imposed on income and wealth of individuals and also on the profits of the companies. In this tax, tax burden cannot be shifted from one person to another. So the impact and incidence will be on the same person.
Eg: Income tax, Corporation tax etc
Indirect taxes
Indirect taxes are the taxes on spending on goods and services. Indirect taxes, tax burden can be shifted, the impact is on one person and incidence up on another.
Eg: Value Added Tax, Customs duties etc
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