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Understanding UK Taxation Basics

Taxation is compulsory levies imposed by governments on individuals, households, and firms. The British government receives tax revenue from a wide range of taxes that totaled £377 billion in 2000-2001. Taxes are needed to raise revenue for government spending, manage aggregate demand and prices, achieve greater equality, correct for externalities, and influence trade balances. The objectives of the British tax system are to keep taxes low overall while shifting the balance from income to spending taxes and ensuring fairness.

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145 views2 pages

Understanding UK Taxation Basics

Taxation is compulsory levies imposed by governments on individuals, households, and firms. The British government receives tax revenue from a wide range of taxes that totaled £377 billion in 2000-2001. Taxes are needed to raise revenue for government spending, manage aggregate demand and prices, achieve greater equality, correct for externalities, and influence trade balances. The objectives of the British tax system are to keep taxes low overall while shifting the balance from income to spending taxes and ensuring fairness.

Uploaded by

mitchgb
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd

economics of taxation

Taxation is any compulsory levy from individuals, households and firms to central or local government. The
British economy imposes a wide range of taxes on people. The system is always evolving as the government
seeks to develop and maintain a tax system that meets objectives and targets.

In the financial year 2000-01, the British government received £377 billion in tax revenue. The breakdown of this
revenue is shown in the chart below

WHY DO WE NEED TO PAY TAXES?

Taxation is levied for a number of reasons.

To raise revenue to finance spending on goods and service by central & local government

The government when managing the level of AD output and prices uses taxation. When demand is perceived as
being too strong the government can increase direct taxation, to reduce the level of real disposable income and
household spending.

A progressive system of taxation can be utilised to achieve great equality in income & wealth between
individuals and households

Taxes can correct for externalities and other forms of market failure (such as monopoly)

Import taxes may control imports and therefore help the country's international balance of payments and
protect industries from overseas competition.

OBJECTIVES FOR THE TAX SYSTEM

 The Labour Government has identified six main objectives for its tax system - these are summarised
below
 To keep the overall tax burden as low as possible
 To reduce tax rates on income to sharpen incentives to work and create wealth in the economy
 To maintain a broad tax base - having a range of taxes helps to keep each separate tax rate low
 To shift the balance of taxation away from taxes on income towards taxes on spending
 To ensure taxes are applied equally and fairly to everyone
 To use taxes to make markets work better (including the use of environmental taxes to make both
consumers and producers aware of external costs)

PROGRESSIVE REGRESSIVE AND PROPORTIONAL TAXES

Generally, indirect taxes are seen as regressive; the proportion of income paid in tax decreases as income rises.

Direct taxes are progressive because the proportion of income paid in tax increases as income rises. With a progressive tax,
the marginal rate of tax exceeds the average rate of tax. As a result, progressive taxes act to reduce inequalities in the
distribution of income. The post-tax distribution of income will be less dispersed than the pre-tax distribution.
With a proportional tax, the proportion of income paid in tax remains constant as income changes. In this situation,
the marginal rate of tax will be equal to the average rate of tax.

Any tax that does not vary with income is called a lump sum tax

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