Understanding Taxation

Study Notes

Tax: a compulsory financial contribution imposed by the government on its citizens to fund public activities and services
Purpose: to redistribute wealth, finance public goods and services, and stabilize the economy

Direct Taxes
- Levied directly on individuals or businesses
- Examples: income tax, wealth tax, property tax
Indirect Taxes
- Levied on goods and services
- Examples: sales tax, value-added tax (VAT), excise tax
Progressive Taxes
- Tax rate increases as income or wealth increases
- Examples: income tax, wealth tax
Regressive Taxes
- Tax rate decreases as income or wealth increases
- Examples: sales tax, excise tax

Ability to Pay: taxpayers should contribute according to their ability to pay
Benefit Principle: taxpayers should pay according to the benefits they receive from public goods and services
Horizontal Equity: taxpayers in similar situations should be treated equally
Vertical Equity: taxpayers in different situations should be treated differently

Fiscal Policy: government's use of taxation and spending to influence the economy
Tax Reform: changes to the tax system to improve efficiency, equity, and simplicity
Tax Avoidance: legal measures to minimize tax liability
Tax Evasion: illegal measures to avoid paying taxes

Tax Authorities: government agencies responsible for collecting taxes and enforcing tax laws
Tax Returns: reports filed by taxpayers to report income and claim deductions
Tax Audits: examinations of tax returns to ensure accuracy and compliance
Tax Penalties: fines or sanctions imposed for non-compliance or tax evasion

A tax is a compulsory financial contribution imposed by the government to fund public activities and services.
The purpose of taxation is to redistribute wealth, finance public goods and services, and stabilize the economy.

Direct taxes are levied directly on individuals or businesses, examples include income tax, wealth tax, and property tax.
Indirect taxes are levied on goods and services, examples include sales tax, value-added tax (VAT), and excise tax.
Progressive taxes have a tax rate that increases as income or wealth increases, examples include income tax and wealth tax.
Regressive taxes have a tax rate that decreases as income or wealth increases, examples include sales tax and excise tax.

The ability to pay principle states that taxpayers should contribute according to their ability to pay.
The benefit principle states that taxpayers should pay according to the benefits they receive from public goods and services.
Horizontal equity principle states that taxpayers in similar situations should be treated equally.
Vertical equity principle states that taxpayers in different situations should be treated differently.

Fiscal policy is the government's use of taxation and spending to influence the economy.
Tax reform aims to improve the efficiency, equity, and simplicity of the tax system.
Tax avoidance involves legal measures to minimize tax liability.
Tax evasion involves illegal measures to avoid paying taxes.

Tax authorities are government agencies responsible for collecting taxes and enforcing tax laws.
Tax returns are reports filed by taxpayers to report income and claim deductions.
Tax audits are examinations of tax returns to ensure accuracy and compliance.
Tax penalties are fines or sanctions imposed for non-compliance or tax evasion.