This chapter includes contents: Define the comprehensive income tax base, discuss the international principles of taxing income, discuss the reasons why the personal income tax base differs from the comprehensive income tax base, explain what a progressive personal income tax is and how progressiveness is achieved,...
• • • • • • • • Define the comprehensive income tax base Discuss the international principles of taxing income Discuss the reasons why the personal income tax base differs from the comprehensive income tax base Explain what a progressive personal income tax is and how progressiveness is achieved Discuss the economic effects of personal income tax Explain why companies are taxed separately Define the company tax base Describe the classical and fully integrated company tax systems • • • • • • • • Describe company tax in South Africa Explain the efficiency of company tax Discuss the importance of company tax in the investment decision Discuss the merits of tax incentives for investment Explain the equity implications of company tax Discuss the arguments for and against capital gains taxation Explain a flat rate income tax Explain the dual income tax Three bases • Income • Wealth • Consumption Income • • Anything that makes consumption possible • Recorded as accrued, not when realised 2 principles • Residence of taxpayer – Country where person lives receives tax • Source of income – Country where income is generated receives tax Issues facing developing countries • Source basis resembles benefit principle • Tax system should not influence locational decisions • • • • • Gross income Exempt income Net income Taxable income Tax expenditures – – – – Exclusions Exemptions Deductions Rebates/credits TOTAL (COMPREHENSIVE) INCOME minus Exclusions (eg imputed rent & unrealised capital gains) GROSS (CASH) INCOME minus Exemptions (eg tax-free portion of interest) NET INCOME minus Deductions (eg contributions to medical scheme) TAXABLE INCOME Tax according to tables GROSS TAX LIABILITY minus Rebates (primary rebate and rebate for age 65 and over) NET TAX LIABILITY • • Unit of taxation/filing status Consider: – Single vs married vs family with children – One partner vs two earning an income • • • Equal marginal sacrifice principle Progressivity Marginal tax rates Equity • Sensitivity of labour supply to price and tax Administrative efficiency • Simplicity • Presumptive taxation • Laffer curve • • • Bracket creep Real income Nominal income Reasons for taxing companies • Separate entities • Recipients of benefits from government • Ability to limit personal income tax liability • Address market failures through taxing excessive profits of imperfectly competitive firms • Administratively simple • Derive revenue that would otherwise accrue to foreign investors The company tax base • Incorporated – Private and public • Unincorporated – Sole proprietorships and partnerships • Mining Taxable income • Total receipts (revenue) – Allowable expenses (costs) • Classical system – Double taxation • • • • Full integration system Dual tax rate – basic tax on companies Proportional tax Secondary tax (STC) • • Real & financial cash-flow tax base equals [(sales + borrowing + interest received) – (real purchases + interest payments + debt repayment)] Advantages – Simple definition – Neutral • Shortcomings – – – – – Windfall tax revenue gains/losses Full & immediate expensing Base shifting International taxation Administration? • • Economic efficiency Investment – – – – Decision to invest Non-tax factors Tax incentives Tax holidays • Incentives for market failures • Compensation for regulatory distortions • Addressing labour market distortions • Constraints in capital markets • Temporary investment incentives for infant industries • External benefits (innovation) • Signal for foreign investors • Administration • Erosion of tax base (necessitating higher tax rates) • Pressure group action • Uneven tax burden • Less successful in attracting foreign investment • Windfall gains would have taken place anyway • Obstacles to investment better address directly Capital gains can be defined as increases in the net value of assets over a period (e.g an accounting period or iscal year) • • • • • As accrue vs as realised Change in ownership of an asset Capital losses First R20,000.00 excluded Exemptions • Protect integrity of personal income tax base • Ensure horizontal equity • Ensure vertical equity • Improve economic efficiency • Administrative challenges • If nominal profits are taxed, equity is at risk • Lock in rather than realise investments • • Flat rate income tax Duel income tax – Personal capital income separately taxed from labour income – Labour income – Company income – Nordic countries • Impact of globalisation and international mobility of capital • Efficiency • Administration • Splitting of income (capital & labour) • Lack of responsiveness to international competition • Vertical inequity ... Lock in rather than realise investments • • Flat rate income tax Duel income tax – Personal capital income separately taxed from labour income – Labour income – Company income – Nordic countries • Impact of globalisation and... decisions • • • • • Gross income Exempt income Net income Taxable income Tax expenditures – – – – Exclusions Exemptions Deductions Rebates/credits TOTAL (COMPREHENSIVE) INCOME minus Exclusions... Discuss the arguments for and against capital gains taxation Explain a flat rate income tax Explain the dual income tax Three bases • Income • Wealth • Consumption Income • • Anything that makes consumption possible