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Worksheet on Taxation (Student Version: Advanced)

Sue Hall
Head of Sixth Form
Embley Park School
Romsey

• Taxation Worksheet (Advanced)
• Tutor notes

This worksheet is designed to help you understand issues of taxation using data obtained from the Internet.

The assignment aims to:

- Research the main sources of government revenue

- Look at the reasons for taxation

- Study recent changes in the tax system and ideas for reform

Step 1 - Government revenue

Governments have no money of their own. Any money the government spends must come from taxation. There are two types of taxation, direct from income and indirect on expenditure. The level and pattern of taxation is important because it affects both efficiency (economic performance) and equity (the distribution of income)

Use the Survey of the UK Tax System http://www.ifs.org.uk/publications.php?publication_id=1711 from the IFS Web site.
Read table 1 Sources of Government Revenue 2004-05 forecasts.

Illustrate the data using a pie chart. Use the total values in each of the categories:

Income Tax
National Insurance contributions
Corporation Taxes
Capital Taxes
VAT
Other Indirect Taxes
Council Tax
Other

Pie Chart to Illustrate Government Revenue

In your own words explain how government revenue is made up.

Step 2
A good tax

In the 1770's Adam Smith outlined the canons of taxation which are just as applicable today. A 'good tax' should be convenient in that it is easy to pay, cost effective , certain and also equitable. It is also felt that a good tax minimises the disincentive effect on effort. In looking at the tax system we need to distinguish between progressive, proportional and regressive taxation. Explain the difference and fill in as many examples as possible in the table below.

Step 3
Types of Taxation

Find out the current tax rates for each of the taxes outlined below using the web site of the Institute of Fiscal Studies http://www.ifs.org.uk/
Use the search facility to look at the articles containing information on taxation. This is easily done by putting TAX into the search facility.

Step 4
Reducing Consumption

Excise duties are flat rate taxes levied on alcoholic drinks, tobacco and petrol. Changes in the rate are made for budgetary reasons and partly from environmental and health considerations to reduce the consumption of these goods.
On the diagram below illustrate the effects of a flat rate tax on the supply curve:

Show on the diagram what will happen to price and quantity.

Illustrate the effects of the tax when the demand for a product is totally elastic and for another that is totally inelastic:

What happens to price?

What happens to quantity?

Who suffers the burden of the taxation and why?

What happens to price?

What happens to quantity?

Who suffers the burden of the taxation and why?

Step 5
UK Tax Reform

Taxation has a number of effects. It reduces the level of disposable income, redistributes income, affects prices, reduces the ability to save and may affect effort and enterprise. The government uses taxation as an instrument of its fiscal or budgetary policy to control fluctuations in the level of aggregate demand. Elements of taxation fluctuate automatically. These are known as automatic stabilisers and they smooth out fluctuations in the business cycle. Discretionary fiscal policy involves the conscious decisions of government to alter taxation and government spending.
Use the site http://www.ifs.org.uk/publications.php?publication_id=1711. Read the section from a Survey of the UK Tax System on the 'summary of recent trends' and look briefly at other sections.

Why do you think the changes they refer to were made?

What was the impact of the changes?

If you would like more information another useful site you may consider visiting is:
The Treasury: (http://www.hm-treasury.gov.uk/about/about_budguide.cfm/)
If you look at the index you can find information on the budget including a list of Chancellors since 1945!

If you click on the Economics Information you will find sites outlining the main economic indicators and predictions for the future from the panel of economic forecasters.

You may also like to look at the Virtual Economy (http://www.bized.co.uk/virtual/economy/). This will allow you to alter tax thresholds, rates, interest rates, government spending and benefitsand see how your changes would affect families and the rest of the economy.