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The following taxes in Ireland can be classified as direct taxes or indirect taxes: VAT PAYE CORPORATION PROFITS TAX (i) Explain the two underlined terms - Leaving Cert Economics - Question 5 - 2008
Question 5
The following taxes in Ireland can be classified as direct taxes or indirect taxes: VAT PAYE CORPORATION PROFITS TAX (i) Explain the two underlined terms. (ii) ... show full transcript
Worked Solution & Example Answer:The following taxes in Ireland can be classified as direct taxes or indirect taxes: VAT PAYE CORPORATION PROFITS TAX (i) Explain the two underlined terms - Leaving Cert Economics - Question 5 - 2008
Step 1
Explain the two underlined terms.
Answer
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VAT (Value Added Tax): VAT is a type of indirect tax that is imposed on the sale of goods and services. It is collected at each stage of the supply chain, where value is added to a product. When a consumer purchases a product, they pay VAT, which is then remitted to the government by the seller.
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PAYE (Pay As You Earn): PAYE is a direct tax system used to collect income tax from employees' wages. Employers deduct tax from employees’ earnings before they receive their pay, allowing for a more efficient collection of tax at the source.
Step 2
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Step 4
State and explain two economic benefits of lower rates of income tax to the Irish Economy.
Answer
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Increased Disposable Income: Lower income tax rates allow individuals to retain a larger portion of their earnings. This increased disposable income can lead to higher consumer spending, stimulating economic growth and creating demand for goods and services.
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Attraction of Foreign Investment: Reducing income tax rates may make Ireland a more attractive location for businesses and foreign investors. Lower taxation can lead to enhanced business profitability, encouraging investment and job creation in the local economy.
Step 5
State and explain two economic disadvantages of lower rates of income tax to the Irish Economy.
Answer
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Reduction in Government Revenue: Lower income tax rates can result in a significant reduction in government revenue, limiting the funds available for public services and infrastructure developments, which may negatively affect economic growth in the long run.
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Inflation Risks: With more disposable income, consumer spending may increase sharply, leading to inflation. Higher inflation can erode purchasing power and create economic instability, which can deter investment.
Step 6
Explain each of the above canons of taxation.
Answer
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Equity: This canon emphasizes fairness in the tax system. It suggests that individuals should contribute to the tax system according to their ability to pay, typically based on their income levels.
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Economy: This principle asserts that the cost of collecting taxes should not exceed the revenue generated. In other words, the administrative expenses of tax collection should be kept low to ensure efficiency.
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Certainty: Taxpayers should have clear understanding of when and how much tax they are required to pay. This leads to predictability in the tax obligations, which aids both government planning and taxpayer compliance.
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Convenience: Taxes should be collected in a manner that is convenient for taxpayers. This includes considerations such as the timing of payments and the methods available for remitting taxes.
Step 7
Explain, with the use of an example, the underlined term.
Answer
Tax Evasion: Tax evasion refers to illegal practices to avoid paying taxes, such as underreporting income or inflating deductions. For example, a teacher who receives cash payments for tutoring students and fails to report that income on their tax return is engaging in tax evasion. This practice undermines the tax system and reduces revenue for public services.