Introduction

Group Members Basit Saeed Faiq

Kamal Faisal Khalid Topic Tax system

What is Tax system Methods of Taxation Tax System of Pakistan A look at some figures

What Is Tax system ?

Ten Principles of Economics: The Government

can sometimes improve market outcomes.

From where does the Government gets its Funds ?????????????

Taxes e.g. In a vegetable market the T.M.A

takes Taxes and in return provides shades and a clean space

Central Government Tax as GDP

TAXES AND EFFICIENCY

Policymakers have two objectives in designing a tax system...

Efficiency Equity

TAXES AND EFFICIENCY

One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers.

An efficient tax system is one that imposes small deadweight losses and small administrative burdens.

TAXES AND EFFICIENCY

The Cost of Taxes to Taxpayers The tax payment itself Deadweight losses Administrative burdens

Administrative Burdens

Complying with tax laws creates additional deadweight losses. Taxpayers lose additional time and

money documenting, computing, and avoiding taxes over and above the actual taxes they pay.

The administrative burden of any tax system is part of the inefficiency it creates.

Dead weight losses

If government raises the tax on cold drinkes people stop taking cold drinks

Similarly if taxes are increased on earning people start to work less and enjoy more leisure

Taxes reduces incentives and hence dead weight losses are increased

Marginal taxes v/s Average TaxesLump sum Taxes

Methods of Taxation

MARGINAL TAX RATES VERSUS AVERAGE TAX RATES

Lump – Sum Taxes

A lump sum tax is a tax of a fixed amount that has to be paid by everyone regardless of the level of his or her income. Lump sum taxes are considered efficient taxes because they do not influence a person’s decision on how much to work.

But why are they no lump sum taxes ????

Lump sum Taxes a Failure in Pakistan For explaining why lump sum taxes cannot work in

Pakistan lets consider only two types of a people for easiness of a MNA and a Unskilled laborer. Average monthly pay of MNA is 360000 and that of laborer is 5000 so if we take the average and 15% to both and lets analyze the results

360000+5000=365000 (adding) 365000/2=185200 (taking average)

(27375/360000)*100=7.6% TAX for MNA

(27375/5000)*100=547.6% TAX for laborer Now the results shows that the laborer have to 5.4 times

more than he earns and the MNA only has to 7.6 percent of his income

How should the burden of taxes be divided among the population?How do we evaluate whether a tax system is fair?

TAXES AND EQUITY

Principles of TaxationBenefits principleAbility-to-pay principle

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Benefits Principle

The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services.

An example is a gasoline tax: Tax revenues from a gasoline tax are

used to finance our highway system. People who drive the most also pay the

most toward maintaining roads.

Ability-to-Pay Principle The ability-to-pay principle is the

idea that taxes should be levied on a person according to how well that person can shoulder the burden.

The ability-to-pay principle leads to two corollary notions of equity. Vertical equity Horizontal equity

Ability-to-Pay Principle Vertical equity is the idea that

taxpayers with a greater ability to pay taxes should pay larger amounts. For example, people with higher

incomes should pay more than people with lower incomes.

Ability-to-Pay Principle Vertical Equity and Alternative Tax

Systems A proportional tax is one for which high-

income and low-income taxpayers pay the same fraction of income.

A regressive tax is one for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers.

A progressive tax is one for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.

Tax Incidence—the Study Of Who Bears The Burden Of Taxes WHO PAYS THE CORPORATE INCOME TAX?

People pay all taxes The owners, workers or the costumers E.g. if tax is increased on fertilizer

company who will be effected 1. Owners 2. Workers 3. Customers

The Federal Government

Budget Surplus A budget surplus is an excess of

government receipts over government spending.

Budget Deficit A budget deficit is an excess of

government spending over government receipts.

The Federal Government

Financial Conditions of the Federal Budget A budget deficit occurs when there is an

excess of government spending over government receipts. Government finances the deficit by borrowing

from the public. A budget surplus occurs when government

receipts are greater than government spending. A budget surplus may be used to reduce the

government’s outstanding debts.

Governments Spending

Federal Government Spending Expense Category:

Social Security National Defense Medicare Health Other

Tax System Of Pakistan

Direct taxationIndirect taxation

Direct Taxation

Salaries Interest on securities; Income from property; Income from business or professions Capital gains; and Income from other sources.

Indirect Taxation

Customs: goods exported or Imported

Central Excise: limited # of goods produced and services provided . It is charged on the basis of value or retail price. Some items are, however, chargeable to duty on the basis of weight or quantity

Sales Tax : goods imported, supplies made in Pakistan by a registered person

Tax on Companies: All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%.

Ratio Of Direct Taxes And Indirect Taxes In Total Taxes

Sales Tax on Imports

Sales Tax On Domestic Products