I.Tax – a payment of money legally demanded and compulsorily collected from individuals or firms by central or local government authority to meet public expenses. So taxes are uncompensated, non-repayable people’s payments to the state in order to help it to finance its expenditure.
Taxation – the process of collecting taxes to raise revenue to finance government expenditure.
II. The functions and purposes of taxation.
III. Classification of taxes and methods/systems of taxation.
1. According to the way of levying taxes:
- direct (income tax, land tax, capital gains tax, capital transfer tax, transport tax, wealth tax)
- indirect (different taxes on sales transactions, property and imports, e.g. value-added tax, excise duties, customs duties, sales tax)
2. According to the level of authority:
- federal taxes (VAT, income tax, customs duties)
- regional taxes (entities estate tax, , sales tax, transport taxes)
- local taxes (land tax, individual estate tax, advertising tax)
3. According to the system of paying taxes:
A progressive tax system is one under which, as persons earn more, their average tax rate rises. Under a proportional tax system, everyone pays the same average tax rate. With a regressive tax system, as persons earn more, their average tax rate falls.
IV. Equity in taxes
1. The marginal tax rate (the tax rate on added income) affects incentives.
2. In a progressive tax system, people with more income pay a higher percent of their income in taxes. The marginal tax rate exceeds the average tax rate, causing the average rate to rise as income goes up. In a regressive system, people with more income pay a smaller percent of their income in taxes. The marginal tax rate is below the average rate, causing the average rate to fall.
Principles of equity:
1. Horizontal Equity: Equals should pay equal taxes. For example, consider the double taxation of corporate income.
2. Vertical Equity: Unequals should pay different taxes.
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