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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 VAT and PAYE
Answer
VAT (Value Added Tax) is a consumption tax levied on the value added to goods and services at each stage of production or distribution. It is typically paid by the end consumer at the time of purchase.
PAYE (Pay As You Earn) is an income tax withholding system whereby an employer deducts income tax from employees' wages or salaries before they are paid. This system ensures that income tax is collected at the source.
Step 2
Step 3
Step 4
State and explain two economic benefits of lower rates of income tax to the Irish Economy
Answer
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Maintain Standards of Living: Lower income tax rates can increase disposable income for individuals, helping maintain purchasing power and improving the overall standard of living, especially during inflation.
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Encourage Economic Activity: Reduced income tax rates can stimulate consumer spending, fostering economic activity. With more disposable income, consumers are likely to spend more, promoting business growth and job creation.
Step 5
State and explain two economic disadvantages of lower rates of income tax to the Irish Economy
Answer
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Decreased Tax Revenue: Lower income tax rates may lead to a reduction in government revenue, which could affect public services and investments in infrastructure, potentially harming long-term economic growth.
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Increased Demand for Services: As disposable incomes increase, there may be a rise in demand for public services. However, with lower tax revenues, the government may struggle to meet this increased demand, leading to issues in service provision.
Step 6
Explain each of the above canons of taxation
Answer
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Equity: Tax should be based on the taxpayer's ability to pay; people with higher incomes should contribute a larger proportion of their income in taxes.
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Economy: The costs associated with tax collection should be kept minimal compared to the revenue generated.
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Certainty: Taxpayers should have clarity on when and how much tax is to be collected, ensuring transparency in tax obligations.
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Convenience: The mechanism for tax collection should be convenient for taxpayers, both in terms of the method used and the timing of payment.
Step 7
Explain, with the use of an example, the term tax evasion
Answer
Tax evasion refers to illegal activities aimed at not paying taxes owed. This can include underreporting income, inflating deductions, or hiding money in undisclosed accounts. For instance, if an individual fails to report income from side jobs or freelance work, they are evading taxes by not disclosing their full earnings to tax authorities.