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Introduction to the Tax Theory
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Page 1: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Introduction to the Tax Theory

Page 2: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Outline

1. The Economics of Taxation

• The role of taxation.

• The main types of taxation.

Page 3: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Outline

1. The Economics of Taxation

• The role of taxation.

• The main types of taxation.

2. The Efficiency Cost of Taxation

• Marginal excess burden.

• Marginal cost of public funds.

Page 4: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Outline

1. The Economics of Taxation

• The role of taxation.

• The main types of taxation.

2. The Efficiency Cost of Taxation

• Marginal excess burden.

• Marginal cost of public funds.

3. Tax Incidence

• Formal and effective incidence.

• Tax capitalisation.

Page 5: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Outline 1. The Economics of Taxation

• The role of taxation.

• The main types of taxation.

2. The Efficiency Cost of Taxation

• Marginal excess burden.

• Marginal cost of public funds.

3. Tax Incidence

• Formal and effective incidence.

• Tax capitalisation.

4. Equity: Efficiency Trade offs in the design of the Tax System

• The structure of income taxes.

• Trade offs btwn equity and efficiency.

• Income distribution and the structure of commodity taxes.

Page 6: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

1. The Role of Taxation

One potential classification of government functions – from an economic perspective would be

• Efficiency

– To reduce distortions in competition.

– To alleviate the problems of incomplete markets

Page 7: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

1. The Role of Taxation

One potential classification of government functions – from an economic perspective would be

• Efficiency

– To reduce distortions in competition.

– To alleviate the problems of incomplete markets

• Equity

– To provide merit goods

– To alleviate poverty.

Page 8: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

1. The Role of Taxation

One potential classification of government functions – from an economic perspective would be

• Efficiency

– To reduce distortions in competition.

– To alleviate the problems of incomplete markets

• Equity

– To provide merit goods

– To alleviate poverty.

• Stabilization (Macroeconomic Policy)

– To manage risks individuals face (insurance).

– Macroeconomic stabilization

Page 9: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Taxation has a role in each of these

1. Efficiency

• Controls externalities.

• Raises revenue for the provision of public goods.

2. Equity

• Can redistribute income

• Can generate revenues that provide other forms of poverty alleviation.

3. Stabilization

• A key instrument in controlling aggregate demand

• And the balance of trade

Page 10: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

What are the criteria for a good tax system?

1. Fairness

• Horizontal Equity

• Vertical Equity

Page 11: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

What are the criteria for a good tax system?

1. Fairness

• Horizontal Equity

• Vertical Equity

2. Efficiency

• Minimize the excess burden

• Poll tax

• Fiscal neutrality

• The correction of externalities

Page 12: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

What are the criteria for a good tax system?

1. Fairness

• Horizontal Equity

• Vertical Equity

2. Efficiency

• Minimize the excess burden

• Poll tax

• The correction of externalities

3. Compliance and Administration Costs

• Compliance Costs = time, money inconvenience

• Administration costs

Page 13: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

CANONS OF TAXATION

• In the 1770’s, Adam Smith in his “Wealth of Nations” book outlined the canons of taxation which are just as applicable today. He recognized that the levy of taxation should comply with certain basic criteria/norms and propounded the following 4 canons/principles of taxation: 1. CONVENIENCE – a convenience tax is one which causes the payer and the collector to do little that they would not do in the absence of tax. In other words, taxpayers should be levied at the time or in the manner in which it is most convenient for the taxpayer to pay it. Eg., for a salaried employee it is convenient for the tax to be collected at the end of the month when the salary is paid

13

Page 14: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

CANONS OF TAXATION

• 2. CERTAINTY – a tax has certainty if the taxpayer can predict their tax liability with reasonable accuracy. It also means that the tax should not be an arbitrary one. The taxpayer should be aware of: – (a) The time to pay – (b) The manner of payment – (c) The amount to be paid

• The information should be available to both the taxpayers as well as to every other person – especially potential investors.

14

Page 15: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

CANONS OF TAXATION

• 3. ECONOMY – a tax is economical if the costs of collection are small relative to the amount of tax collected. The tax should be easy and cheap to collect and should fall directly on the ultimate payer.

• If great resources must be diverted to the collection of taxes, they are simply wasted.

• Economical taxes are those that have low administrative costs and are therefore, efficient.

15

Page 16: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

CANONS OF TAXATION

• 4. EQUITY – The idea behind the question of equity as far as taxation is concerned is that every citizen in country ought to contribute towards the support of the government, as nearly as possible, in proportion to their abilities.

• In other words, the citizen ought to contribute to the support of the government in proportion to the revenue which they enjoy under the protection of the government.

• This incorporates the issue of fairness, and with the income tax, fairness is generally interpreted to mean that taxpayers should be taxed in proportion to their “ability to pay”.

• How progressive the tax structure should be, is a matter of debate.

16

Page 17: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

2. The Efficiency Costs of Taxation

Let us consider a Perfectly Competitive Market.

In the Long Run we might treat supply as being a horizontal straight line.

Page 18: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Equilibrium Before a Tax – P*Q*

Price

Quantity

Demand Curve

Supply Curve

P*

Q*

Page 19: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Now Introduce a Tax (lump sum)

Price

Quantity

Demand Curve

Supply Curve

P*

Q*

Supply Curve including tax

P**

Tax

Q**

Page 20: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Some Obvious Consequences

1. Consumers are paying more for each unit. (bad)

2. Government is earning taxes. (might be good)

3. Consumers are buying fewer units. (bad)

4. Firms are making fewer units. (Neutral here as perfect competition implies they make zero profit)

How do these costs and benefits add up?

Page 21: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Tax Revenue = Tax x Number of Units

Price

Quantity

Demand Curve

Supply Curve

P*

Q*

Supply Curve including tax

P**

Tax

Revenue

Q**

Page 22: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Tax Revenue = Exactly the losses of consumers who still buy

Price

Quantity

Demand Curve

Supply Curve

P*

Q*

Supply Curve including tax

P**

Extra Paid by

Consumers

Q**

Page 23: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

This gain and loss exactly cancel

The tax revenue

=

The extra paid by the consumers who still buy the taxed commodity.

This is just a redistribution of income not an inefficiency.

Summary:

One effect of taxes is to transfer resources to the government.

This reduces taxpayers’ disposable incomes.

Page 24: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

The Substitution Effect

The price of this commodity has risen relative to other commodities.

• This affects the incentives of the private sector.

• It distorts markets.

Page 25: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

The Substitution Effect

The price of this commodity has risen relative to other commodities.

• This affects the incentives of the private sector.

• It distorts markets.

It generates “rents”

A tax on tobacco makes growing it less attractive, therefore land prices fall.

Tobacco machinery manufacturers lose as do tobacco workers.

(Any input into a taxed commodity suffers.)

Page 26: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

This person was prepared to pay this much for the good.

Price

Quantity

Demand Curve

Supply Curve

P*

Q*

Supply Curve including tax

P**

Q**

Page 27: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Actually had to pay less.

Price

Quantity

Demand Curve

Supply Curve

P*

Q*

Supply Curve including tax

P**

Q**

Page 28: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

But after the tax did not buy the good so this value was lost

Price

Quantity

Demand Curve

Supply Curve

P*

Q*

Supply Curve including tax

P**

Q**

Page 29: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Adding all these values then gives society’s total loss.

Price

Quantity

Demand Curve

Supply Curve

P*

Q*

Supply Curve including tax

P**

Q**

Page 30: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

The Excess Burden

Marginal Excess Burden The excess burden of an extra £ raised in taxes.

(This is generally higher than the average burden, as should tax least distorting commodities first.)

• A good tax system should impose taxes with least excess burden first.

• Optimally, the marginal excess burden of each tax instrument should be the same.

Page 31: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

3. Tax Incidence

In other words – who bears the burden of taxes?

An important distinction:

Formal Incidence: Who is legally obliged to pay the tax.

Effective Incidence: Who actually bears the burden of the tax?

Page 32: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

3. Tax Incidence

In other words – who bears the burden of taxes?

An important distinction:

Formal Incidence: Who is legally obliged to pay the tax.

Effective Incidence: Who actually bears the burden of the tax?

These differ because prices can change as a result of a tax.

Page 33: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Taxes On Business

All taxes formally incident on business will have their final incidence on customers, shareholders and employees:

VAT, ED (sales taxes) – Are Passed on and affect prices and customers also output and employees.

Profits Tax – Affect shareholders and investment decisions (suppliers of capital).

Asset Taxes – Affect investment decisions.

Page 34: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Effective Incidence is all that Matters to an Economist

Who is legally obliged to pay a tax – is largely irrelevant if the taxed individuals can take actions to mitigate the effects the tax has.

Page 35: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

The Effect of a Sales Tax on a Market

A market before a tax is imposed at equilibrium

Price

Q s

Q D

Page 36: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

The Effect of a Sales Tax on a Market

The tax raises the price paid by consumers.

It lowers the price received by suppliers.

Price

Q s

Q D

TAX

Page 37: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Why Does this Happen?

Suppose the firms tried to raise their prices and pass on all the tax increase to the consumers, then:

(1) The higher price for consumers would mean they would choose to buy less.

(2) However, the firms would still want to supply the same amount.

(3) The market has Supply > Demand and prices will fall.

(4) Thus prices for firms will fall until

Supply(Price less tax) = Demand (Price including tax)

Page 38: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

The Effect of a Sales Tax on a Market

Notice also – less goods are produced.

Some consumers don’t buy at the higher price.

Some sellers don’t produce at the lower price.

Price

Q s

Q D

Page 39: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

This reduces consumer surplus and producer surplus

P

Q s

Q D

Lost consumer surplus

Page 40: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

This reduces consumer surplus and producer surplus

P

Q s

Q D

Lost consumer surplus

Lost producer surplus

Page 41: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

But generates tax revenue

P

Q s

Q D

Page 42: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Giving a net loss in value – Excess Burden (or DWL)

↓Q

Q s

Q D

Page 43: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

WHO PAYS THE TAX?

When buyers are price sensitive “demand is elastic” it is the sellers who pay the tax.

Page 44: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

WHO PAYS THE TAX?

When buyers are price sensitive “demand is elastic” it is the sellers who pay the tax.

Page 45: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

WHO PAYS THE TAX?

When buyers are price sensitive “demand is elastic” it is the sellers who pay the tax.

Tax Incidence on Buyers

Page 46: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

WHO PAYS THE TAX?

When buyers are price sensitive “demand is elastic” it is the sellers who pay the tax.

Tax Incidence on Buyers

Tax Incidence on Sellers

Page 47: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

WHO PAYS THE TAX?

When sellers are price sensitive “supply is elastic” it is the buyers who pay the tax.

Tax Incidence on Buyers

Tax Incidence on Sellers

Page 48: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Tax incidence in sum...

S

P

Q

D

S

Suppliers pay nominal incidence...

D

Consumers pay nominal incidence...

P

Q

D

S

P

Q

D S

Suppliers pay nominal incidence... S

P

Q

D S

Consumers pay nominal incidence...

D

Page 49: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Deadweight Loss

P

Cigarettes

D

S

PC =P2

Q2

P1

Q1

PS

Stax

$1.50 CS CS

P

PS

P

PS

Social Cost Tax Revenue

Deadweight Loss

Page 50: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Questions:

Who pays the taxes on

(1) Cigarettes

(2) Alcohol

(3) Petrol

(4) Labour?

Page 51: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

4. Taxation and Equity

IF policy makes care about equity they will care about the winners and losers associated with tax changes.

Recall

A tax is progressive if payment as a % of income increases as income rises.

A tax is regressive if payment as a % of income decreases as income rises.

A tax is neutral if payment as a % of income is constant as income rises.

Page 52: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Tax Equity

• One theory of fairness is called the benefits-received principle, which holds that taxpayers should contribute to government (in the form of taxes) in proportion to the benefits that they receive from public expenditures.

Page 53: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Tax Equity

• Another theory of fairness is called the ability-to-pay principle, which holds that citizens should bear tax burdens in line with their ability to pay taxes.

• Two principles follow: horizontal equity and vertical equity.

Page 54: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Horizontal and Vertical Equity

• Horizontal equity holds that those with equal ability to pay should bear equal tax burdens.

• Vertical equity holds that those with greater ability to pay should pay more.

Page 55: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

What is the “Best” Tax Base?

• The three leading candidates for best tax base are:

– Income,

– Consumption, and

– Wealth

Page 56: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Distributional Effects of Taxes

We can assess the distributional effects of one tax or of the tax system as a whole.

• The overall incidence is more important than the effects of single taxes.

• But introducing progressive taxes may improve a regressive system.

• Remember it is still important to focus on the economic incidence of taxes not the formal incidence.

Page 57: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Marginal versus Average Tax Rates

There are 2 distinct ways of achieving progressive tax systems:

(1) Raise the marginal rate of taxes at higher income levels.

(2) Allow some income to not be liable for taxes (a tax-free allowance) or introduce tax credit.

Page 58: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Increasing marginal rates

Example: 25% for first £30k and 50% tax rate thereafter.

Income

Marginal

Tax Rate

25%

50%

Average Rate

Page 59: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Example Continued

You earn £50k

Your tax bill =

£30k x 0.25 = £7,500

Plus (£50k-£30k) x 0.50 = £10,000

= £17,500

Average Tax Rate = 17500/50000 = 35%

Page 60: Introduction to the Tax Theory - Masarykova univerzita · Introduction to the Tax Theory . Outline 1. ... CANONS OF TAXATION •In the 1770’s, Adam Smith in his “Wealth of Nations”

Tax Free Allowance

Example: 0% for first £10k and 25% tax rate thereafter.

Income

Marginal

Tax Rate

25%

Average Rate


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