Page 13 - F1 Integrated Workbook STUDENT 2018

Features of Taxation and the Regulatory Environment

Introduction to Taxation

The Government needs tax revenues to finance expenditure such as the Health
Service, Retirement Pensions, Social Benefits and to finance Government borrowing.
The Government will use tax to stimulate one sector of the economy and control
another. For example, allowances on capital expenditure may develop the
manufacturing sector, while high taxes on tobacco and alcohol may discourage
sales.

In Wealth of Nations, Adam Smith proposed that a good tax should have the
following characteristics:

 fair (reflect person’s ability to pay)

 absolute (certain not arbitrary)

 convenient (easy to pay)

 efficient (low collection costs)

The 3 major principles of good tax policy are as follows:

 Equity – A good tax should be fairly levied between one taxpayer and another.

 Efficiency – A good tax should be cheap and easy to collect, i.e. UK tax system
uses the PAYE (pay-as-you-earn) to collect tax at source on salaries and
wages.

 Economic effects – A good tax should consider the way in which a tax should
be collected.

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