Question

Taxation in America is always a "hot topic." In designing a taxation system

a. what are the basic principles to be considered?

b. how is the burden of a tax calculated?

c. list the three basic tax burdens (Hint: one of them is "progressive.") and list examples of each.

d. if the government creates a tax on wealth that taxes the first $50,000 of assets a person owns at 1%, the next $50,000 at 2%, the third at 3% and so on, what type of tax burden is that? How much tax would you owe if you had $125,000 in assets (car, personal property and small home)?

Answer 1

Ans:a) The basic principles of taxation was given by Adam Smith, called as canons of taxation. the basic canons of taxation are:

a) Canon of equality: This canon states that taxes should be levied justly on the citizens. it does not mean that there should be equality in taxes on all the people but it believes in justice. The rich should pay more and the poor should pay less.

b) Canon of Certainty: The amount of tax, time of payment and mode of payment should be certain and not confusing.

c)Canon of Convenience It should be convenient to pay taxes and should not involve heavy paperwork for people.

d) Canon of Economy: It should be economical, that means the expenditure of government should not exceed its revenue.

Ans:b) Burden of tax is also called the incidence of tax is calculated by calculating the elasticity of demand and supply, which helps to understand that what amount of burden has fallen on buyers and sellers.

Buyer's incidence of tax= amount buyer pay- price without tax

Seller's incidence of tax= market price- amount seller receives without tax

Ans:c) There are three major types of incidence of taxation

• Progressive- with increase income taxes levied also increase. example in income tax
• Regresiiive- with increase income, taxes levied is decreased
• proportionate- when the percentage of tax given from the income remains constant.

Ans:d) it is an example of progressive tax

total amount of tax paid= starting 1% of 50,000= 500

then 2% is =1000

then 1.5 ( as only 25,000 assests are left)= 375

total tax paid= 500+1000+ 375=1875