# Principles of Economics/Taxation

Taxation is principal method by which a government gains revenue into its budget. That revenue goes into a vast number of items, from paying debt, deafening the potential for implementing certain policies to paying for public services and welfare benefits and the military, etc. There are many methods by which tax revenue can be gained, and different definitions and structures to taxation which are outlined below. Also, conflicts in choosing methods and forms of taxation occur, pitting priorities such as reducing iniquity of income against maximizing incentive for economic growth. Taxes can also help to structure all sort of economic transactions, in a way that the state can exert influence in all participants even over the currency used.

## Principles of a Good Tax System

* Efficient - A tax system should raise enough revenue such that government projects can be adequately sponsored, without burdening the economy too much (not particularly the tax payer), as not to become a disincentive for performance (internal and external investment, work returns and savings).
* Understandable - The system should not be incomprehensible to the layperson, nor should it appear unjust or unnecessary complex. This is to minimize discontent and costs.
* Equitable - Taxation should be governed by people's ability to pay, that is, wealthier individuals or firms with greater incomes should pay more in tax while those with lower incomes should pay comparatively less.
* Benefit Principle - Those that use a publicly provided service (which is funding primarily through taxation) should pay for it! However, conflicts in principle may and often do arise between this and principle 2.

## Direct and Indirect Taxation

* Direct taxes are paid by taxation on the income of the wage earner. This form of taxation is avoidable, although tax is collected before the worker collect his/her wages most workers evade tax because not all workers are on payroll system.for instance,a maisons, drivers etc are self employed, therefore they evade direct tax always. public servant and some private institution workers can rarely evade direct tax.
* Indirect taxation is often unavoidable and is not taken from wages. An example of indirect taxation is VAT (Value Added Tax) or sales tax placed on goods and services.Everyone buys goods and services and whatever payment one makes include an indirect tax, hence,this tax cannot be evaded.
The benefits and costs of both forms of taxation are many. Direct taxation reduces the incentive to work, as 'take home' pay is reduced as a result of an increase in income tax compared to unemployment benefits. On the other hand, indirect taxation may result in people with similar incomes and wealth paying different amounts, simply as a result of slightly different circumstance. For example, someone who has to travel 50km to work every day will pay more tax over the year than another who can walk, even though they may earn the same amount and use the same public services, etc...

## Taxation Structure

It is worth knowing some terminology to make understanding easier. The marginal rate of tax (MRT) is the percentage taken in tax of the next (insert currency unit here) earned. So, if your MRT is 10%, every next part of your income you earn will be taxed at 10%. However, this doesn't make your average rate of tax (ART) 10%. Consider the following:
* Say your income is §10,000. If the first half of your income is taxed at 5%, and the second half at 15%, your MRT is 15%. However, your ART is

### Proportional Taxation

Proportional taxation means that MRT = ART, so if a low income earner is taxed at 20%, so is a higher income earner. The proportion of tax paid is always the same, though in absolute terms it goes up the higher your income.

### Progressive Taxation

Progressive taxation means that MRT > ART (with MRT and ART > 0). For example, in the UK there are three rates of income tax - 10% 'starting tax', 22% 'standard tax', and 40% high rate of tax.more like 30-40% ART. Thus, higher income earners pay a greater proportion of their income in tax than low earners.

### Regressive Taxation

This is very rarely done intentionally by a government, as it would be extremely unpopular and would be seen as supporting wealthy, high income individuals over more needy households. However, indirect taxation could be said to partly support this. Very high income earners may spend a lower proportion of their income on goods and services, and so pay proportionally a fewer taxes as a percentage of their income.