External Environment: Taxation (GCSE)

There are some key reasons why government needs to levy taxes; the main ones are:

• To raise revenue to finance government spending
• Managing aggregate demand - to help meet the government's economic objectives
• Changing the distribution of income and wealth
• Market failure and environmental targets – taxes may help correct market failures (e.g. pollution)

An important distinction can be made between direct and indirect taxes:

Direct taxation

Direct taxation is levied on income, wealth and profit

Direct taxes include:

Income Tax

National Insurance Contributions

Corporation Tax

Capital Gains Tax

Indirect taxation

Indirect taxes are levied on spending by consumers on goods and services

Examples:

VAT (currently 20% on relevant spending)

Excise duties on fuel and alcohol, car tax, betting tax and the TV licence

Who pays?

The burden of an indirect tax might be passed onto the consumer by the producer

Depends on the price elasticity of demand and supply for the product

The effects of the main types of taxation on businesses (in the UK) can be summarised as follows: