The Role of Taxation
- The main source of government revenue is taxation
- Taxation is used to redistribute income so as to reduce income inequality in a nation
Types of taxes
- Direct taxes are taxes imposed on income and profits
- They are paid directly to the government by the individual or firm
- E.g. Income tax, corporation tax, capital gains tax, national insurance contributions, inheritance tax
- Indirect taxes are imposed on spending
- The less a consumer spends the less indirect tax they pay
- Examples of indirect tax include Value Added Tax (19% VAT rate in the European Union in 2022), taxes on demerit goods such as excise duties on fuel or cigarettes
Types of tax systems
- Tax systems can be classified as progressive, regressive or proportional
- Most countries have a mix of progressive (direct taxation) and regressive (indirect taxation) taxes in place
An Explanation of tax Systems
System |
Explanation |
Diagram |
Progressive |
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Regressive |
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Proportional |
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The link Between Taxation & the Reduction of Income Inequality & Poverty
Progressive taxation |
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Higher redistribution → better education/healthcare → better human capital → better productivity → higher income |