Tax: A Definition
A tax or duty is a compulsory charge imposed on an individual or legal entity by a government or equivalent. In Australia taxes and duties are imposed by Federal, State or local governments.
The supposed purpose of taxes and duties is to provide public goods and semi-public goods (e.g., sovereign and legal enforcement), to promote production which has high positive externalites (e.g., physical infrastructure, public health and education), to minimise or otherwise deal with actions which produce negative externalities (e.g., pollution), and to minimise effects of market failure (e.g., strategic investment).
In reality these legitimate purposes are heavily distorted by powerful vested interests and political lobby groups.
The total quantity of money that taxes and duties take from the public are always somewhat greater than the amount which can be used by the government. The difference, "compliance costs", includes the labour cost and other expenses, such as avoidance and policing, incurred in complying with tax laws. Such costs may be borne by either the tax payer, the receiver, or both.
Most economists agree that nearly all taxation distorts the market and results in a degree of economic inefficiency. In contrast public finance from site revenue is largely recognised as causing the fewest economic distortions and with low overall compliance costs.
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The striking result is that a tax on rent will lead to no distortions or economic inefficiencies. Why not? Because a tax on pure economic rent does not change anyone's economic behavior. Demanders are unaffected because their price is unchanged. The behavior of suppliers is unaffected because the supply of land is fixed and cannot react. Hence, the economy operates after the tax exactly as it did before the tax--with no distortions or inefficiencies arising as a result of the land tax. Paul Samuelson, William D. Nordhaus, Economics, 16th edition, p.250 |
Taxes are usually levied as a percentage from a base (on income, assets, inheritence etc.) either as an 'ad valorem' figure on the value of the good or service or as an excise on the quantity of a good, regardless of price. When discussing tax rates it is necessary to distinguish between the marginal rate and the average rate. The marginal rate is the percentage paid between increments whereas the average rate is the total amount paid as a percentage.
A related concept is whether taxes are "flat-rate", "progressive" or "regressive". A flat-rate tax remains a consistent rate regardless of base (thus, the marginal rate and average rate will be the same), whilst a progressive tax increases in rate as the base increases (the marginal rate increases greater than the average rate), whereas a regressive tax has a higher marginal rate on as the base decreases.
A further differentiation is between direct taxes and indirect taxes. A direct tax is collected from the individual or organisation whom the tax is imposed, whereas an indirect tax is collected from a different person or organisation other than the person paying the tax. A common example of direct taxes include income taxes, whereas an indirect tax is sales tax.
