The Role Of Taxation In An Economy Economics

Added on - 27 Apr 2021

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TaxationDFA 2104Y (3)
Purpose of taxation in themodern economyA taxation system impacts on the economy of a country as awhole.Economic, social and environmental factors may affect thegovernment’s tax policiesFocus on UK tax system: Finance Act 2019The UK tax system encourages (economic aspects):1.Saving on the part of the individual, by offering tax incentives such astax-free Individual Savings Accounts (ISAs) and tax relief on pensioncontributions2.Charitable donations through Gift Aid scheme3.Entrepreneurs who build their own business, through reliefs fromcapital gains tax4.Investment in Plant & Machinery through capital allowances5.Marriage and civil partnerships through transferable personalallowance (marriage allowances).The UK tax system discourages:1.Motoring – fuel duties2.Smoking and alcoholic drinks – taxes on these items
Purpose of taxation in themodern economySocial aspect:In a free market, some individuals generate greateramounts of income and capital than others and oncewealth has been acquired, it tends to grow through thereinvestment of investment income received.This can lead to the rich getting richer and the poorpoorer, with economic power becoming concentrated inrelatively few hands.Electors make the value judgment that these trendsshould be countered by taxation policies whichredistribute income and wealth away from the richtowards the poor.
Purpose of taxation in the moderneconomyDifferent taxes have different social effects:Direct taxes: based on income and profits (income tax), gains (capitalgains tax) or wealth (inheritance tax). These taxestax only those whohave resourcesIndirect taxes: paid by the consumer (VAT). Thesediscouragespendingand encourage saving. Lower or nil rates of tax can be leviedon essentials, such as foodProgressive taxes: e.g income tax, where the proportion of the incomeor gains paid over in tax increases as income/gains rise,target thosewho can afford to pay. Personal allowances and the rates of taxationcan be adjusted so as to ensure that those on very low incomes paylittle or not taxTaxes on capital or wealth ensure that people cannot avoid taxation byhaving an income of zero and just living off the sale of capital assets
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