How_Money_Works_-_The_Facts_Visually_Explained

The level of taxation

Pigouvian taxes

Standard economic theory says that if consuming a good or

service causes harm, a tax should be applied to it until the

value of the tax matches the cost of the harm done. As shown

to the right, a government could impose a tax on sugar to

match the cost to public health services of obesity. In the US,

some states tax sugary drinks, but the percentage varies.

How it works

Governments can impose taxes on a person’s earnings,

their buildings and homes, savings and investments,

pensions, inherited property, or on what they spend.

Most governments rely heavily on income taxes,

usually with different proportionate levels for different

levels of earnings. This makes the tax system fairer,

but introducing more complexity also increases the

chances of tax avoidance. However, some taxes are

levied in order to change behavior. By taxing

something viewed as bad, such as tobacco or alcohol,

the government can help to persuade people to

consume less of those things.

It is difficult for governments to establish how much tax to levy. Too

low, and the government cannot provide the services people want.

Too high, and people will be unwilling to pay the tax.

Drinks with over 8g of sugar

per 3½ ounces could be

taxed at $.08 per can/

carton—or $.24 per liter.

Drinks with 5-8g of sugar per

3½ ounces could be taxed at

$.06 per can/carton—or $.18

per liter.

Milk- and fruit-based drinks,

teas, and coffees might not be

taxed, regardless of sugar content.

Carib

Ginger

Ale

No

Bull

Sug

Nite

Fiasco Peppy Bro

Uvena

Dextrozade

15. 2g
    10.3g

11g

10.6g 10.6g

Dr.

Jones Orango

Cafteen

Sea

Mist

Honesto

smoothie

Juniper

juice

Lifta

Schmoozer

6.3g 6.5g

7. 5 g

11g

13.6g

6.6g

5.1g

10.6g

9.9g

11g

Chocolate

milk

Smooch Skydosh Monkey

Frothacino Chai latte

9.3g

13.7g 13. 8g

$$$

❯❯Effective tax rate Many tax systems allow different

“reliefs”—such as investment relief to encourage

investment. More than one tax may also be levied at

once, for example income and corporation tax. As a

result, the effective (average) tax rate may differ from

the headline (basic) rate.

❯❯Marginal tax rate Describes the additional tax paid

from undertaking a small amount of extra activity—for

example the extra tax paid in earning $1 more. Decisions

made “at the margin” influence the behavior of

individuals and businesses, such as whether it is worth

working longer hours.

❯❯Gray economy People who work for cash wages or

fees and do not declare their income, in order to avoid

paying tax.

NEED TO KNOW

US_126-127_Setting_Taxation_levels.indd 126 13/10/2016 16:18