Question

 

1a) Discuss Horizontal and vertical equity. Provide taskbase and and 3 major categories.

1b) Discuss important methods of financing deficit and consequeces of each method.

1c) Discuss tax evasion and avoidiance and the cost and benefits.

Answer 1

1 a) Horizontal Equity : Horizontal equity states that taxpayers with equal earnings and assets should pay tax at par.

Vertical Equity : Vertical equity states that people with higher earinings should pay more tax.

3 major categories are as follows :

i) Progressive : Progressive concept emphasises on the ability to pay tax . Thus people with higher ability to pay tax should pay more than with lower abity to pay

ii) Regressive : This concept relates to charging taxes from higher to lower as the taxation amount increases.

iii) Propotional : This states that there will be equal rate of taxes and not depending on the taxation amount increasing or decreasing.

1 b) Various methods of deficit financing are as follows :

i) Government may pull out funds from central bank from the balances.

ii) Government may take loan from central bank.

iii) Government may tend to printing of currency notes in additional.

Consequences of the above methods : i) Inflation : Deficit financing leads to increase in money suppy which leads to additional purchasing power and thus demand for goods and services increases but supply of goods and services do not increase at that pace and thus this leads to inflation.

ii) Inequality in income : Deficit financing leads to fixed income earners suffering and businessman flourishes in this times because of rise in prices of goods and services.

iii) Decrease in additional employment : In backward countries , creation of additional employment reduces due to lack of raw materials and machineries though adequate money is available in the economy.

1 c) Tax Evasion : Tax evasion is an unlawful activity which leads in avoid paying true tax liability.

Tax Avoidance : Tax avoidance is a legitimate way of paying low taxes by following all the Income Tax rules.

Cost and benefits of Tax Evasion - Person avoid paying taxes lead to high cost for government because goverment earning becomes less in respect of development work. Tax evader gets benifited from it.

Cost and benefits of Tax Avoidance : Government though earn less from tax but tax payer invest in many government approved funds to avoid tax and thus this lead to funding for government in other way.