How it works
Governments have the unique
privilege of being able to demand
that anyone in their country pay
taxes. These can be divided into
“direct” taxes, which are paid from
earnings, either by people or by
institutions, and “indirect” taxes,
which are paid for out of consumer
spending. Taxes can be levied as a
share of spending or income, or as
a flat rate. A progressive tax system
is one in which richer individuals
pay proportionately more tax.
Questions surrounding the level
of taxation are hotly debated. As
a result, taxation rates, and laws
about who or what pays for which
taxes, vary significantly from
country to country.How tax works
Direct and indirect taxes
People have to pay taxes on either their income, or on
what they spend. Some typical taxes on an individual
in the UK are shown below.Taxation is the main way in which governments raise the revenue
needed to pay for public spending. Governments may tax the public
directly (such as with income tax) or indirectly (via VAT, for example).TA X E S AN D
BEHAVIOURSome taxes are designed to reduce
the amount of revenue that goods
earn. Because a newly-levied or
increased tax on a product raises its
price, that item becomes less
attractive to buy. Where a product,
such as cigarettes, is harmful, higher
taxes can be a way to reduce public
consumption. In cases in which the
behaviour of consumers does not
alter much in response to higher
pricing, however, the extra tax is
likely to raise much more money.
This can make such taxes appealing
for governments seeking revenues.D IRE C T TA X E S
National insurance 12.5%
This is a tax on earnings levied on
employees and employers to pay
for social services.Income tax 20%
Income tax is paid
directly out of an
individual’s earnings.
Net income
Once taxes on earnings
have been paid out, the
amount remaining is
called “net” income.NET INCOME
£
£
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