Taxation - Charges on individuals and organisations by governments.
Direct Taxation - This includes income tax, National insurance and corporation tax - direct taxes are charged on earnings.
Indirect Taxation - This includes VAT, excise duties (e.g. on petrol and alcohol), car tax, insurance tax and others.
In 2015, the government raised a total of £647 billion from taxation.
94% came from central sources such as income tax, corporation tax and
indirect taxes , just 6% came from local taxation (council tax)
Direct taxation is levied on earnings and will affect the level of a
consumers' disposable income. For example, an increase in income tax
will reduce sales of many products and services, with some expectations.
Indirect taxation such as VAT will have a similar effect; an
increase in the rate of VAT will increase prices (although food eaten at
home and a few other products such as housing, books and children's
clothes carry no VAT). This will reduce consumer spending.
Businesses selling products that carry excise taxes, such as fuel and alcohol, may see demand fall if those taxes are increased.
Corporation tax is a tax on business profits; in 2015 it was reduced
to 20%. Decreases in this tax will increase the amount of profit a
business can keep; this may encourage it to invest in future growth. Too
high a rate of corporation tax may deter foreign companies from
locating in the UK.
There are some key reasons why government needs to levy taxes; the main ones are:
To raise revenue to finance government spending
Managing aggregate demand - to help meet the government's economic objectives
Changing the distribution of income and wealth
Market failure and environmental targets – taxes may help correct market failures (e.g. pollution)
An important distinction can be made between direct and indirect taxes:
Direct taxation
Direct taxation is levied on income, wealth and profit
Direct taxes include:
Income Tax
National Insurance Contributions
Corporation Tax
Capital Gains Tax
Indirect taxation
Indirect taxes are levied on spending by consumers on goods and services
Examples:
VAT (currently 20% on relevant spending)
Excise duties on fuel and alcohol, car tax, betting tax and the TV license
Who pays?
The burden of an indirect tax might be passed onto the consumer by the producer
Depends on the price elasticity of demand and supply for the product
The effects of the main types of taxation on businesses (in the UK) can be summarised as follows:
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