August 10, 2009
- What is TAX?
A Tax is a Financial Charge or a legal entity by a state or functional equivalent of a state.
EX: secessionist movements or revolutionary movements.
Tax Consist Direct Tax and Indirect Tax.
A direct tax is one paid directly to the government by the persons
Examples include some income taxes, some corporate taxes, and transfer taxes such as estate (inheritance) tax and gift tax. In this sense, a direct tax is contrasted with an indirect tax or “collected” tax (such as sales tax or value added tax (VAT)); a “collected” tax is one which is collected by intermediaries who turn over the proceeds to the government and file the related tax return.
An indirect tax (such as sales tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed.
Purposes and effects
Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social engineering, and the operation of government itself. Most modern governments also use taxes to fund welfare and public services. These services can include education systems, health care systems, and pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities. Colonial and moderning states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.
Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business, or to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign and military aid, to influence the macroeconomic performance of the economy or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.
A country’s tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden–who will pay taxes and how much they will pay–and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community which the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power.
The resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since (in reality) money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls.
Some economists, especially neo-classical economists, argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimize this distortion. Also, one of every government’s most fundamental duties is to administer possession and use of land in the geographic area over which it is sovereign, and it is considered economically efficient for government to recover for public purposes the additional value it creates by providing this unique service.
Since governments also resolve commercial disputes, especially in countries with common law, similar arguments are sometimes used to justify a sales tax or value added tax. Others (e.g. libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism, in which the provision of all social services should be a matter of voluntary private contracts.
Main article: Tax incidence
Diagram illustrating taxes effect
Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax “burden”) is determined by the marketplace as taxes become embedded into production costs. Depending on how quantities supplied and demanded vary with price (the “elasticities” of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence).
To illustrate this relationship, suppose the market price of a product is US$1.00, and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product is a luxury (in the economic sense of the term), a greater portion of the tax will be absorbed by the seller. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price).
Taxes are most often levied as a percentage, called the tax rate. An important distinction when talking about tax rates is to distinguish between the marginal rate and the effective (average) rate. The effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned. For example, if income is taxed on a formula of 5% from US$0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750 in taxes.
((0.05*50,000) + (0.10*50,000) + (0.15*75,000)) = 18,750
The “effective rate” would be 10.7%:
(18,750/175,000) = 0.107
The “marginal rate” would be 15%.
The Four “R”s
Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.
The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems. This is the most widely known function.
A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections, and this function is widely accepted in most democracies, although the extent to which this should happen is always controversial.
A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax.
A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan “no taxation without representation” implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects
Types of taxes:
1. Ad valorem
2. Environment Affecting Tax
3. Capital gains tax
4. Consumption tax
5. Corporation tax
7. Income tax
8. Inheritance tax
9. Poll tax
10. Property tax
11. Retirement tax
12. Sales tax
15. Transfer tax
16. Value Added Tax / Goods and Services Tax
17. Wealth (net worth) tax
India has following taxes in general
- Environment Affecting Tax
- Capital gains tax
- Consumption tax
- Corporation tax
- Income tax (personal and corporate)
- Inheritance tax
- Poll tax
- Property tax
- Retirement tax
- Sales tax
- Transfer tax
- Value Added Tax / Goods and Services Tax
- Wealth (net worth) tax
- Entertainment Tax
- Food Tax
- Fringe Benefit Tax
Income Tax – Income Tax Rates/ Slab 2007-08
Personal tax rates
For individuals, HUF, Association of Persons (AOP) and Body of individuals (BOI):
For the Assessment Year 2008-09 Taxable income slab (Rs.)
- Up to 1,10,000 – NIL
- Up to 1,45,000 (for women) – NIL
- Up to 1,95,000 (for resident individual of 65 years or above) NIL
- 1,10,000 ﾢﾾﾀﾾﾓ 1,50,000 – 10%
- 1,50,001 ﾢﾾﾀﾾﾓ 2,50,000 – 20%
- 2,50,001 ﾢﾾﾀﾾﾓ 1,000,000 – 30%
- 1,000,001 upwards 30*
- A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs 1,000,000.
Note : –
Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any. A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
|purpose of taxation
By hameed hussain, On 2/20/08 4:37 AM
Taxation has four main purposes or effects:
The main purpose is
taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems. This is the most widely known function.
Normally, this means transferring wealth from the richer sections of society to poorer sections, and this function is widely accepted in most democracies, although the extent to which this should happen is always controversial.
Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax.
The American revolutionary slogan “no taxation without representation” implied this: rulers tax citizens and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.