Eco basic.ppt
- 1. SUPPLY SIDE POLICY Supply side policies are policies designed to increase aggregate supply and hence increase productive potential. Such policies seek to increase the quantity and quality of products and raise the efficiency of markets. Improving education and training Cutting direct taxes Benefits reforming Trade unions Privatization. Improving education and training is designed to raise labour productivity.
- 2. HISTORY During the reign of Egyptian Pharaohs 1st Tax Collection by Jews In Greece A tax was imposed only in times of war In Athens A monthly tax called Metoikon was collected to foreigners Ancient Greek Taxation Taxation was used as an emergency power. In England Taxes were first used as an emergency measure Unit-34: Incidence of Taxation
- 3. Q: WHAT ARE THE REASONS FOR TAXATION ? a) To finance the provision of merit and public goods such as education health law and order and national defence. b) To influence the level of consumer spending in order to control the level of inflation. c) To reduce the inequality in the distribution of income the rich pay more in taxes which helps finance free education and health for the poor. d) Taxes on imports (tariff) can be used to protect domestic industries from foreign competition. e) The government can use taxes to discourage the consumption of demerit goods such as cigarettes and alcohol.
- 4. HOW MANY TYPES OF TAXATION? Direct tax: are those types of taxes which cannot shift to other person or impose only on income and assets. Ex Income tax, corporation tax, in heritage tax etc. Indirect tax: are those types of tax which imposes only on goods. Example. Tax on computer, car etc.
- 5. CONT. Income tax- Tax on income Corporation profit tax: Tax on profit of a company In heritage tax: Tax on properties
- 6. TYPES OF INDIRECT TAX VAT – Value added tax. Custom duty: Tax on imported goods Excise duty: tax on domestically produced goods Car tax: Special tax.
- 7. INCIDENCE OF TAX Copyright © 2004 South-Western Size of tax Quantity 0 Price Price buyers pay Price sellers receive Demand Supply Price without tax Quantity without tax Quantity with tax
- 8. TAX INCIDENCE AND ELASTICITIES Copyright © 2004 South-Western Elastic Demand Price 0 Quantity Size of tax Demand Supply 2.00 1.25 2.25 Size of tax
- 9. TAX INCIDENCE AND ELASTICITIES Copyright © 2004 South-Western Demand Supply Inelastic Demand Price 0 Quantity Size of tax 2.00 1.75 2.75 Size of tax
- 10. THE EFFECTS OF A TAX LEVIED ON SELLERS Copyright © 2004 South-Western Size of tax Quantity 0 Price Price buyers pay Price sellers receive Demand Supply Price without tax Quantity without tax Quantity with tax
- 11. DEADWEIGHT LOSS AND TAX REVENUE FROM THREE TAXES OF DIFFERENT SIZES Copyright © 2004 South-Western Tax revenue Quantity 0 Price (b) Medium Tax PB Q2 PS Supply Demand Q1
- 12. EXPLAIN THE STRUCTURE OF TAXATION Progressive tax: A tax is progressive when people with higher incomes pay a greater percentage of their income in tax. Example, income tax. Regressive tax: When the income rises but the rate of tax decline. This is known as regressive tax. Eg. Export oriented goods. Proportional tax: When the income rises but the rate of tax is remaining same. Ex. Corporation profit tax.
- 13. WHAT ARE THE ARGUMENTS IN FAVOR OF LOWERING DIRECT AND RAISING INDIRECT TAXES? Incentive for hard work: Lower income taxes will increase people’s disposable income. This will motive them to work harder as they know they will be left with more money as a result of raise or a promotion, if income taxes are reduced. On the other hand levels of income tax could act as a disincentive for hard work, as most of the extra income could go to the government. More choice for taxpayers: Consumer have more choices regarding indirect taxes, as they can simply reduce or even avoid consuming the product. A direct tax is a tax on income and therefore cannot be avoided. More revenue for the government: An increase in indirect taxes, particularly on goods with inelastic demand (for example necessities such as petrol and habit forming goods such as cigarettes and alcohol) could increase the revenue earned by the government. This revenue can be used to finance the provision of merit and public goods. Government can influence the pattern of demand: Raising the indirect taxes on certain products for example, demerits goods such as cigarettes and alcohol could reduce consumption of these items. Indirect taxes can help the government to influence consumer behavior. Reduction in unemployment: Lower direct taxes will lead to an increase in people’s disposable income and as a result the aggregate demand will rise. This will lead to the creation of jobs as firms will increase output levels to match the rise in demand.
- 14. Q: WRITE DOWN THE ARGUMENTS AGAINST REDUCING DIRECT TAX AND INCREASING INDIRECT TAXES. Inflationary effect: Reducing direct taxes would increase people’s disposable income. As a result consumer spending should increase leading to a rise in aggregate demand and demand pull inflation. Increasing indirect taxes will also lead to higher prices. Imperfect distribution of income and wealth: Income taxes are progressive and as a result lead to a more equitable distribution of income as the rich pay a higher proportion of their income. Reducing income tax could make it more difficult to achieve this goal. Indirect taxes are by nature regressive as the burden is higher on the poor. This could widen the gap between the rich and the poor. Government revenue could fall: Income taxes are an important source of government revenue and lowering direct taxes could lead to a significant reduction in government income. Balance of payments problems: Rising indirect taxes and lowering direct taxes will have an inflationary effect. A rise in the price of domestically produced goods will encourage people to buy more foreign products. The country’s exports will also become less competitive. A fall in exports and rise in imports will lead to balance of payments difficult.