Topic# 3: General Theory of Taxation. Romanian tax system General theory of taxation PROF. ANDREEA STOIAN, PHD LECTURE 5

Transcription

1 Topic# 3: General Theory of Taxation. Romanian tax system General theory of taxation PROF. ANDREEA STOIAN, PHD LECTURE 5

2 Content General theory of taxation Taxes Principles of taxation Tax base and tax rate structure

3 Learning outcomes Students will be able to: Define the concept of tax Know the principle of an efficient and fair taxation Understand the basic terminology use to analyze the impact of taxes on the economy, including the tax base and tax structure Discuss issues related to the distribution of the tax burden

4 Mick Jagger "I love America, but I can't spend the whole year here. I can't afford the taxes."

5 What are taxes? Compulsory payments associated with certain activities Revenues collected through taxation are used to purchase the inputs necessary to produce government-supplied goods or to redistribute the purchasing power among citizens

6 Adam Smith s Four Principles of Taxation The subjects of every state ought to contribute towards the support of the government, as nearly as possible in proportion to the revenue which they respectively enjoy under the protection of the state. (Principle of equity) The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. (Principle of certainty) Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. (Principle of simplicity) Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. (Principle of efficiency) Smith, Adam (1776), The Wealth of Nations, Book V, Chapter II

7 London Poll Tax Riot March1990, London The PM, Margaret Thatcher proposed a tax reform The replacement of the taxes on property which had been paid using a proportional rate with a lump-sum Consequences: Wounded, 400 people Arrested, 350 people

8 What is tax fairness? Vertical equity The principle that groups with more resources should pay higher taxes than groups with fewer resources Concerns over vertical equity could be motivated by a utilitarian social welfare function that calls for redistribution from lower to higher marginal utility of consumption groups in society Horizontal equity The principle that similar individuals who make different economic choices should be treated similarly by the tax system

9 Measuring vertical equity Progressive tax system Proportional tax system Regressive tax system Effective average tax rate must rise with the income, so that the rich pay a higher share of their income in taxes that do the poor Tax system in which the effective average tax rate does not change with the income Tax system in which effective average tax rates fall with income

10 What is the tax base? The item or economic activity on which the tax is levied. The most commonly used tax bases can be grouped into three broad categories: income consumption wealth

11 Tax rate structure It describes the relationship between the tax collected during a given accounting period and the tax base The Average Tax Rate (ATR) The Marginal Tax Rate (MTR)

12 Exercise Proportional tax rate structure (flat tax rate) Progressive tax rate structure Tax bracket

13 Tax burden Tax Burden = Tax Revenues GDP 100

14 The benefit principle The means of financing governmentsupplied goods and services should be linked to the benefits that citizens receive from government Fees and charges are ideal forms of government finance

15 Modern Principles of Taxation (I) OECD Neutrality: Taxation should seek to be neutral and equitable between forms of business activities. A neutral tax will contribute to efficiency by ensuring that optimal allocation of the means of production is achieved. A distortion, and the corresponding deadweight loss, will occur when changes in price trigger different changes in supply and demand than would occur in the absence of tax. In this sense, neutrality also entails that the tax system raises revenue while minimizing discrimination in favor of, or against, any particular economic choice. This implies that the same principles of taxation should apply to all forms of business, while addressing specific features that may otherwise undermine an equal and neutral application of those principles. Efficiency: Compliance costs to business and administration costs for governments should be minimized as far as possible. Certainty and simplicity: Tax rules should be clear and simple to understand, so that taxpayers know where they stand. A simple tax system makes it easier for individuals and businesses to understand their obligations and entitlements. As a result, businesses are more likely to make optimal decisions and respond to intended policy choices. Complexity also favors aggressive tax planning, which may trigger deadweight losses for the economy

16 Modern Principles of Taxation (II) OECD Effectiveness and fairness: Taxation should produce the right amount of tax at the right time, while avoiding both double taxation and unintentional non-taxation. In addition, the potential for evasion and avoidance should be minimized. Flexibility: Taxation systems should be flexible and dynamic enough to ensure they keep pace with technological and commercial developments. It is important that a tax system is dynamic and flexible enough to meet the current revenue needs of governments while adapting to changing needs on an ongoing basis. This means that the structural features of the system should be durable in a changing policy context, yet flexible and dynamic enough to allow governments to respond as required to keep pace with technological and commercial developments, taking into account that future developments will often be difficult to predict.

17 Tax incidence Who bears the tax? Tax incidence: assessing which party (consumers or producers) bears the true burden of a tax Statutory incidence: the burden of a tax borne by the party that sends the check to the government Economic incidence: the burden of taxation measured by the change in the resources available to any economic agent as a result of taxation

18 Economic incidence (I) Tax wedge: the difference between what consumers pay and what producers receive for a transaction

19 Economic incidence (II) Tax incidence the side of the market on which the tax is imposed is irrelevant to the distribution of tax burden

20 Economic incidence (III) Inelastic demand

21 Economic incidence (IV) Perfect elastic demand

22 Tax incidence - summary The statutory burden of a tax does not describe who really bears the tax The side of the market on which the tax is imposed is irrelevant to the distribution of tax burden Parties with inelastic supply or demand bear taxes; parties with elastic supply or demand avoid them

23 online.ase.ro PROFESSOR S Q