Role of the Government:
Reallocating Your Resources and Redistributing Your Income
Reallocation of Resources
Expenditure of fed. Govt is largely financed through collection of taxation revenue. Changes can affect resource allocation:
Expenditure on collective goods/services & social welfare financed by tax will shift resources from private to public sector. Changes to allocation/composition of govt expenditure will alter resource allocation in the economy
Tax of some goods/services and not other will alter relative prices and demand (price elasticity). Impact on allocation of resources in production of goods/services by private sector
Govt may use selective assistance/incentives to various industries to en/discourage certain types of production (cause reallocation)
Taxation Criteria (Terms)
Equity: how taxation burden (% of gross income paid in tax) is distributed accordingly to ability of taxpayers to pay
Vertical equity: higher tax burdens applying to people who earn more
Horizontal equity: Equal tax burden for people who earn the same
Efficiency: the degree of which how tax won’t change allocation of resources (shouldn’t change savings/investment/production/consumption/export decisions/reduce economic efficiency)
Simplicity: public’s understanding and certainty over tax (ease of collection, liabilities, compliance: minimization of avoidance (legal) & evasion (illegal))
Tax Base & Tax Rate
Tax base: what is being taxed (income, consumption spending, company profits, capital gains, fringe benefits, superannuation, resources eg petrol)
Tax Rate: % of tag base paid in tax
TAXATION REVENUE = TAX BASE x TAX RATE
Direct and Indirect Tax
Direct: paid by individuals/firms, cannot be passed onto others e.g. income tax. PAYG (Pay as you go) tax is when tax is withheld to pay for the total expected tax amount, get a possible tax return at the end
Indirect: imposed on one group but passed to final consumer e.g. sales, customs
Main Types of Govt Taxation
PAYG/Income: tax on personal income of employees
Company: tax on company income/profits at 30%
Superannuation Funds: concessional rate of 15%
Withholding: tax on interest, dividends and royalties for overseas ppl
PRRT: petroleum resource rent tax at 40% of profits of petrol projects
Sales: applied to goods such as luxury cars and wine
Excise: taxing manufacturers of products such as tobacco, alcohol and fuel
Customs: imposed on importers of luxury/capital/immediate goods
Capital Gains: applied to real gains from share and real estate sales
Fringe Benefits: applied to non cash benefits at 36%
GST: 10% on taxable supplies
Impact of tax: initial point/person at which tax is imposed
Incidence of tax: person/group who pays the tax
Direct tax: Impact and Incidence are same, Indirect: NOT
Australian Government Expenditure
Redistribution of Income: Taxation
Average rate of taxation (ART) = Tax payable / taxable income x 100
Marginal rate of taxation (MRT) = Change in payable / change in taxable x 100
Income Tax Systems
Progressive (High income earners pay greater percentage of income than low income e.g. income, fringe benefits, capital gains): ART and MRT both rise as taxable income increases, MRT >ART
Proportional (all income earners pay same percentage e.g. income): ART = MRT do not change as taxable income changes
Regressive (high income pays lower percentage e.g. customs, GST): ART and MRT fall as taxable income increases, MRT<ART
“Some tax perks for middle and high income earners are likely to be cut, and the government has already announced cuts to fringe benefits tax concessions for company cars.” http://www.smh.com.au/business/federal-budget-2011-what-we-know-so-far-20110510-1egvk.html#ixzz1P9ZzFIxB Social Security and Welfare
Budget introduced the
