Tanya Bhatia is teaching live on Unacademy Plus
THEORY OF TAXATION WITH MCQ'S By- Tanya Bhatia
WHAT IS A TAX? A tax is a Compulsory levy and those who are taxed have to pay the sums irrespective of any Corresponding return of services or goods by the Government.
PRINCIPLES OF TAXES *The four canons of taxation has given by Adam Smith. 1.Canon of Equity 2.Canon of Certainty 3.Canon of Convenience 4.Canon of Economy
BENEFIT-RECEIVED THEORY .It was initially developed by KNUT WICKSELL and Later Prof. LINDHAL. According to this theory the burden of taxation should be divided among the people in proportion to the benefits received from the state.
ABILITY TO PAY APPROACH .This was given by Seligman and Contribution by Pigou, Edgeworth and Kaldor. .According to this approach, a citizen is to pay taxes because he can and his relative share in the total tax burden is determined by his relative paying Capacity.
SACRIFICE PRINCIPLE This was given by Richard Musgrave *Three Sacrifice Principles- 1.Equal Absolute Sacrifice 2.Equal Proportional Sacrifice 3.Equal Marginal Sacrifice
EQUAL ABSOLUTE SACRIFICE This means that different tax payers are made to sacrifice the same amount of utility by way of taxes. Less Progressive .U(Y)-U(Y-T)
EQUAL PROPORTIONAL SACRIFICE In this case each tax-payer is supposed to sacrifice the same percentage of the total satisfaction which he would derived from his income. More Progressive than Absolute Equal Sacrifice. U(Y)b
EQUAL MARGINAL SACRIFICE OR THE LEAST AGGREGATE SACRIFICE According to this theory the tax burden should be imposed in such a way that the marginal utility of income left after tax with any tax payer would be same. Highly Progressive.
INCIDENCE OF TAXES Who ultimate bears the burden of tax. Whereas Impact of a tax is its first point of contact with the tax payers. It is upon those who bear the first responsibility of paying it. Incidence of Tax, on the other hand is defined as its final resting place.
BURDEN ON PRODUCERS Supply is Perfectly Inelastic- Full Burden on Producers Supply is less Elastic- more Burden on producers
VERTICAL EQUITY Vertical equity is based on the idea that those who earrn more money, or have more economic resources, should be taxed at higher rates than those earning less money. The idea is that those who have the means to pay more taxes should contribute at higher rates than those who do not. For example, if someone who earns 50,000 is subject to a 10% tax rate and someone who earns 100,000 is subject to a 20% tax rate, then the system is considered vertically equitable.
.Q3-The ability to pay principle of taxation is logically most consistent with the Normative Notion of- 1. Taxation Neutrality 2. Horizontal Equity 3. Value-added taxatiorn 4. Vertical Equity
.Q4- The greater the elasticity of supply the greater is- 1. Incidence of tax on buyers 2. Incidence of tax on sellers 3. Impact of tax on sellers 4.Impact of tax on buyers