Taxation
Taxation is any compulsory levy from individuals, households and firms to
central or local government.
Why do we need to pay taxes?
Taxation is levied for a number of reasons:
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



To raise __________ to finance spending on goods and service by central &
local government
The government uses taxation as a tool of ____________ policy when
managing the economy. If aggregate demand is perceived as being too strong
the government can __________ direct taxation, to reduce the level of real
disposable income and household spending.
A progressive (see below) system of taxation can be utilised to achieve
great equity in income & wealth between individuals and households
Taxes can correct for externalities and other forms of __________________
(such as monopoly)
Import taxes (known as ___________) may control imports and therefore help
the country's international balance of payments and protect industries from
overseas competition.
Direct and Indirect taxes
A direct tax refers to any levy that is both imposed and collected on a specific
group of people or organizations. An example of direct taxation would be income
taxes that are collected from the people who actually earn their income.
Indirect taxes are collected from someone or some organization other than the person
or body that would normally be responsible for the taxes. A sales tax, for instance,
would not be considered a direct tax because the money is collected from merchants,
not from the people who actually pay the tax (the consumers).
Direct taxes include:
Income tax
Income tax is a direct tax on all incomes received by private individuals after certain
allowances are made. Often a certain amount of a person’s income will be tax free.
Income over this amount is known as taxable income.
National insurance/social security contributions
A direct proportional tax (see later) taken off the earnings of those people in
employment. Employers also pay contributions for each worker they employ. (Many
workers in China and Hong Kong make contributions towards retirement funds).
Corporate tax/Business tax
Tax on the profits of companies whether the profits are earned home or abroad - a
proportional tax. In Hong Kong, the rate is 16.5%. (In China it is 25%).
Inheritance Tax?
Capital Gains Tax?
Indirect taxes include:
VAT/Sales tax/Goods & Services tax
These are consumption taxes and occur when a good/service is sold to the consumer.
In China the rate of VAT is 17%, in the UK it is 20% and in Korea it is 10%. Hong
Kong does not charge any VAT/GST.
Excise duties
These are taxes, charged in addition to VAT, primarily on gasoline, alcohol and
tobacco (commonly referred to as sin taxes). They are a specific tax- charged per unit
or volume consumed as opposed to ad valorem tax.
General Revenue
350
%)
ion
Salaries Tax
(22.8%)
Stamp Duty
(17.0%)
Betting Duty
(7.4%)
Others
(3.2%)
2013-14
(69.1%)
2012-13
ns
349
Import
taxes
Figure 3 Composition of the revenue collections
These, as their name implies, are taxes on specific types of imports.
(69.7%)
2013-14
Profits Tax
(49.6%)
Other General Revenue
Figure 4
The chart on the right shows the
composition of tax revenue by
source in Hong Kong. As is
evident, there is no__________ tax
charged in Hong Kong.
The pictorial below shows how
much excise duty and VAT makes
up the price of a pack of
cigarettes in UK.
Progressive, Regressive and Proportional taxes
Income tax is a progressive tax. This means that as income rises the proportion or
percentage of income paid in taxation rises.
So, in Hong Kong, the first HK$40,000 of a person’s annual income is taxed at 2%
(marginal rate of tax), the next HK$40,000 at 7%, the next HK$40,000 at 12% and
any remaining salary above that is taxed at 17%. Because the marginal rate of tax
rises at certain levels of taxable income, the average rate of tax paid also rises with
income.
0
TAX BANDS
80,000
40,000
120,000
YEARLY INCOME (HK$)
2%
7%
12%
17%
MARGINAL RATE OF TAX
Using the tax bands and marginal tax rates for Hong Kong, complete the following
table for maximum marginal rax rate, tax payable and average tax rate. The first
example has been done for you.
Taxable
Income (HK $
per year)
50,000
100,000
300,000
5,000,000
Max. marginal
Tax rate
7%
Tax Payable (HK$)
800 + 700= 1500
Average tax rate = Tax
payable/ taxable
income
3%
In China, the marginal tax rates for monthly income are shown as follows: (note there
is a tax exemption of 3500 for regular employees- this means that if an employee
earned 10,000 RMB per month, he/she would be exempt from paying tax on 3500 and
would pay tax on 6,500 instead).
from [RMB]
0
1500
4500
9000
35000
55000
80000
Income (Rmb
per month)
8,000
15,000
30,000
100,000
to [RMB]
1500
4500
9000
35000
55000
80000
over
Exemp
tion
Taxable
income
3,500
3,500
3,500
3,500
4,500
Marginal tax rate [%]
3
10
20
25
30
35
45
Max.
marginal
Tax rate
10%
Tax Payable
(Rmb)
Average tax rate
= Tax payable/
taxable income
Proportional taxes
A tax is proportional when all taxpayers pay the same percentage of their income or
wealth. Corporation tax and national insurance are examples. In the example below,
corporation tax is set at 25% of profits.
Taxable
profits
RMB
400,000
Tax rate
Tax
payable
(RMB)
25%
600,000
900,000
5,000,000
Regressive taxes
Generally, indirect taxes are seen as regressive; the proportion of income paid
in tax decreases as income rises. Regressive taxes will take a greater
percentage of income or wealth from the poor. Sales tax/VAT is generally seen a
regressive as those on low incomes will inevitably spend more of their income
than those on high incomes. Low income families will have a higher ____________.
Income /-
VAT
Taxable
expenditure
40,000
40,000
20%
60,000
50,000
20%
90,000
70,000
20%
500,000
300,000
20%
Tax payable
Tax paid as
%
of
income