Download TAXATION BASICS A THE FUNCTIONS OF TAXATION The primary

TAXATION BASICS
A THE FUNCTIONS OF TAXATION
The primary function of taxation is, of course, to raise revenue to finance government
expenditure, but taxes can also have other purposes. Indirect excise duties, for example,
can be designed to discourage people from smoking, drinking alcohol and so on.
Governments can also encourage capital investment that allows companies to deduct
the cost of investments from their profits, and consequently reduce their tax bills.
B ADVANTAGES AND DISADVANTAGES OF DIFFERENT TAX SYSTEMS
There is always a lot of debate as to the fairness of tax systems. Business profits, for
example, are generally taxed twice: companies pay tax on their profits (corporation tax
in Britain, and income tax in the USA), and shareholders pay income tax on dividends.
Income taxes in most countries are progressive, and are one of the ways in which
governments can redistribute wealth. The problem with progressive taxes is that the tax
people pay on any additional income is always high, which is generally a disincentive to
both working and investing. On the other hand, most sales taxes are slightly regressive,
because poorer people spend a larger proportion of their income on consumption than
the rich.
C TAX EVASION
The higher the tax rates, the more people are tempted to cheat, but there is substantial
‘black’ or ‘underground’ economy nearly everywhere. In Italy, for example, selfemployed people, whose income is more difficult to control than that of company
employees, account for more than half of national income. Lots of people also have
undeclared, part-time evening jobs (some people call this ‘moonlighting’) with small or
medium-sized family firms, on which no one pays any tax or national insurance.
D AVOIDING TAX ON SALARIES
To reduce income tax liability, some employers give highly-paid employees lots of perks
or benefits instead of taxable money, such as company cars, free health insurance and
subsidized lunches. Legal ways of avoiding tax, such as these, are known as loopholes in
tax laws. Life insurance policies, pension plans and other investments by which
individuals can postpone the payment of tax are known as tax shelters. Donations to
charities that can be subtracted from the income on which tax is calculated are
described as tax-deductible.
E AVOIDING TAX ON PROFITS
Companies have a variety of ways of avoiding tax on profits. They can bring forward
capital expenditure (on new machinery and equipment, for example) so that at the end
of the year all the profits are used up and not taxed – this is known as making a tax loss.
Multinational companies often set up their head offices in countries such as
Liechtenstein, Monaco, the Cayman Islands, and the Bahamas, where taxes are low –
such countries are known as tax havens. Criminal organizations, meanwhile, tend to
pass money through a series of companies in very complicated transactions in order to
disguise its origin from tax inspectors or the police – this is known as money laundering.
Source: I. MacKenzie, English for Business Studies, Second Edition, CUP 2002
TAXATION BASICS - QUIZ
1. What is the primary function of taxation?
2. What are two other functions of taxation?
3. What are indirect excise duties?
4. In what way are business profits taxed twice?
5. What’s the difference between progressive and
regressive taxation?
6. What’s the difference between tax evasion and tax
avoidance?
7. What is black or underground economy?
8. What is moonlighting?
9. Name three ways of avoiding taxes on salaries.
10. Give examples of perks or benefits.
11. Give examples of tax shelters.
12. What is described as tax deductibles?
13. Name three ways of avoiding taxes on profits.
14. How can you make a tax loss?
15. What countries are known as tax havens? Give
examples.
16. Why is money laundering illegal?