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Check Your Understanding Pg. 301 1. Which of the following principals of taxation is the most fair – ability to pay or benefits received? Explain. Which principal is the easiest to implement? Explain. Ability to pay principal provides fairness based upon means. Benefits received provides fairness based upon usage fees 2. For each of the five types of taxes collected by governments in Canada, determine whether each is an example of direct or indirect taxation. Also determine whether each is a progressive or regressive tax. Type of Tax Personal income tax Corporate income tax Sales tax Excise tax Property tax Direct or Indirect Direct Direct Direct Indirect Direct for homeowners Indirect for renters Progressive or Regressive Progressive Progressive Regressive Regressive Regressive 3. Use supply and demand graphs to explain how the elasticity of demand helps determine the effect of an indirect tax on the market price and on consumption. 4. List the economic and political advantages and disadvantages of using each of the following methods to increase government revenue: Personal income taxes, corporate income taxes, gasoline excise taxes, tobacco excise taxes, consumption/sales taxes Method of Increasing government revenue Personal income tax Economic Impact Advantages Economic Impact Disadvantages Political impact - Advantages Political impact - Disadvantages Less spending can reduce price inflation Does not add to government debt Unpopular with voters Corporate income tax Distribution of income can be improved Popular with voters Gasoline tax Less disposable income and consumer demand can slow growth Less profit is left for investment spending Transportation costs will increase for businesses, cutting profits Roads & highways can be improved and new projects undertaken Consumption is Employment in discouraged tobacco related industries can decline Consumer Aggregate spending is spending discouraged decreases, which can slow down economic growth rate Unpopular with corporate investors and managers Increases the cost of living for most Canadians Tobacco tax Sales tax Roads & highways maintained by users; gas consumption discouraged Consumption discouraged Luxury goods can be taxed more than necessities Smugglers will bring untaxed, illegal tobacco into Canada Lower-income Canadians are more adversely affected 5. List and explain the tax reforms introduced since 1990. Explain the effect of the GST on the ability of Canadian firms to compete in global markets. Marginal tax rates on personal income were reduced to allow Canadians, especially lower-income earners, to keep more of their income Tax credits were increased for low-income earners to help offset the regressive nature of sales and property taxes The GST (a consumption tax) replaced the FST (a manufacturing tax) to reduce production costs and increase the global competitiveness of firms Alberta and Ontario lowered provincial income tax rates in order to stimulate consumer spending and economic growth
