IGCSE Economics

5.2 Taxation

Learning Outcomes

• Describe the types of taxation (direct, indirect, progressive, regressive, proportional) and the impact of taxation

In this world nothing can be said to be certain except death and taxes.Benjamin Franklin

2 Minute Challenge……

What do governments spend their money on?

In pairs write down as many things as you can that governments spend money on…..

2 Minute Challenge……

• Where do governments get money from to fund this expenditure

In pairs write down as many sources as you can that governments can obtain funds from

• Borrowing from the private sector

• Rents from publicly owned buildings and land

• Admission charges, for example from public museums and monuments

• Revenue from the sale of some public services such as postal services and public transport

• Proceeds from the sale (or privatization) of government-owned industries and other publicly owned assets

• Interest charges on government loans to the private sector and overseas governments

• Taxes on incomes, wealth and expenditures

Where governments get money…..

2 Minute Challenge……

Other than to gain revenue, what other reasons might a government have for taxation?

In pairs write down as many reasons as you can for why governments tax households and businesses

• To raise revenue

• To manage the macro-economy

• To reduce income inequality after tax

• To discourage spending on imports

• To discourage the consumption and production of harmful products

• To protect the environment

Increase in income tax rates raises $3 billion

Tax cuts to boost employment and growth

America’s soft drinks industry battles proposals to tax sugary sodas

India introduces carbon tax on coal producers

Reasons for Taxation

2 Minute Challenge……

What types of taxes do governments use?

In pairs write down as many different types of taxes as you can

Any questions on what these taxes are and how they work?

Good tax or bad tax?

Principles of Good Tax…

• Equity/Fairness• Non-distortionary• Certainty• Convenience• Simplicity• Administrative Efficiency

Task

• Read the article ‘Strange Taxes from around the world’

2 types of taxation

What ‘s the difference????

2 types of taxation

Direct Taxes….. Pros and Cons

Pros• High revenue yield• Can be used to reduce

inequalities• Are based on ability to

pay

Cons• Can reduce work

incentives• Can reduce enterprise

incentives• Tax evasion

Video – Tax Avoidance

• Watch the video on the Tax avoidance of major MNCs

• Why has this happened?• How has this been able to happen?• What can governments do about this?

Indirect Taxes….. Pros and Cons

Pros• They are cost effective to

collect• A wide tax base. Anyone

who buys goods and services will pay some indirect taxes

• They can be used to discourage consumption and production of harmful products

Cons• The cost of collecting

taxes falls to businesses• They are regressive• Tax revenues are less

certain because they depend on spending patterns

• They add to price inflation

What do these words mean in the context of taxation?

Progressive

Proportional

Regressive

Progressive Tax

• A bit like Robin Hood – Steals from the rich and gives to the poor!

• People/Firms with higher incomes pay a higher proportion of their income

Proportional Tax

• The same proportion of income is paid regardless of income level

Regressive Tax

• The proportion of income paid in tax falls as income rises

• (although the actual amount will increase)

Whiteboard Quiz - Which type of tax(es) will apply?

• David Beckham’s wages?• A meal in a restaurant?• New trainers?• A flight to Malaysia?• A bottle of Smirnoff Vodka?• Philippines Air buying a new Airbus?• Selling shares at a profit?• Coca-Cola’s Profits?

Task – Types of taxation

• Fill in the table ‘Types of Taxation’• Be as detailed as you can

If you finish early…….Research the rates of these taxes in the Philippines

BALANCING THE BOOKS – GOVERNMENT REVENUES AND SPENDING

Balancing the budget

Budget deficit

Public expenditure Tax revenue

Budget surplus

Public expenditure Tax revenue

In the Budget a government sets out its plans for public spending and raising tax revenues for the financial year ahead

An expansionary fiscal policy will increase a budget deficit or reduce a budget surplus

A contractionary fiscal policy will reduce a budget deficit or increase a budget surplus

UK Budget Deficit as a % of GDP

• A government must borrow if public expenditure exceeds public revenue. This is known as the PSBR – Public Sector Borrowing requirement

• The total amount of money borrowed by the public sector of a country over time that has yet to be repaid is the public sector or national debt

• Taxes will have to increase or other public spending cut to pay rising interest charges if the national debt expands at a faster rate than national income ▼ US national debt… ▼ US debt as a proportion of US GDP

National Debt

Video

• Watch the video ‘Visualisation of Japan’s debt’ to see an explanation of national debt and how it accumulates

Task:

• Textbook Activity 5.12• Homework:

– Read pages 316-317– Answer questions 1-6