A teacher version of the worksheet on sources of government revenue and the impact of indirect taxes on prices and markets.

Worksheet on Taxation (Tutor Version: Advanced)

Sue Hall

Step 1

A numerical exercise in constructing a pie chart to illustrate the sources of government revenue.
Income Tax- 25.3%
National Insurance Contributions- 16.3%
Corporation Taxes- 14.4%
Capital Taxes- 1.6%
VAT- 16.2%
Other Indirect Taxes- 13.6%
Council Tax- 3.4%
Other- 9.1%

Students are expected to comment on the pie chart to outline how government revenue is made up. They should include a mention of the balance between direct and indirect taxation and analyse the differences.

Step 2
A good tax

Simple explanations are required with examples:
Progressive- Taxes which take a higher percentage of the incomes of higher income earners e.g. Income Tax
Proportional- Taxes which take the same percentage of everybody's income
Regressive- Taxes which take a higher percentage of income from the lower income earner than the high income earner e.g. VAT

Step 3
Types of Taxation

The current rates on 14 February 2001 are;

Income Tax 10%, 22%, 40% - extension work could involve discussion of allowances

VAT 17.5%, 0% for exempt goods- further research could be for students to find out which goods are exempt and why.

Capital Gains Tax Gains over £7,200 are taxed at the individuals income tax rate and companies pay corporation tax on their capital gains

Corporation Tax 30%, reduced to 20% for small companies with a lower rate of 10%.

Excise Duty Beer 26p, cigarettes (20) 181p duty plus 87p ad valorem, wine (75cl) 116p, spirits (75cl) 548p, petrol (litre) 51p, unleaded 49p, diesel 49p

Step 4
Reducing Consumption

Supply and Demand exercises:

In the first diagram students should shift the supply curve and explain the rise in price and decrease in quantity.

In the second diagram students should observe that price stays the same and quantity falls. All the burden is taken by the producer due to the perfectly elastic demand curve. An increase in price resulting in loss of market.

In the third diagram students should observe that the quantity does not change when price changes. The burden is taken entirely by the consumer whose demand is perfectly inelastic. Increases in price will lead to no change in quantity demanded.

Step 5
UK Tax Reform

The Changes

In the tax reform section a number of suggestions about the reasons for tax reform could be included such as the impact of taxation on the labour supply and the incentive to work. The political agenda of the government and the finance of the government mentioning the PSNCR. The management of the economy and the impact on savings.

The Impact of the Changes

The result should have meant that people are prepared to work harder and be more inclined to take employment and the encouragement of enterprise. However the shift of the burden from direct to indirect taxation has made the tax system less fair in that taxation on goods hits those on lower incomes the hardest. This could lead to discussion of inequality and policies to alleviate inequality such as minimum wage legislation.

Obviously the actual impact of the changes is open to debate and could lead to extension work on supply side policy

In preparing students for the budget, follow the link to the Virtual Economy from the Institute for Fiscal Studies (http://www.ifs.org.uk/) which is an entertaining interactive resource on Biz/ed. There is also the Treasury web site (http://www.hm-treasury.gov.uk) which provides updated materials in the Economics Briefings and full details on all Budgets.