How_Money_Works_-_The_Facts_Visually_Explained

The level of taxation

Pigouvian taxes in action

Standard economic theory says that if consuming goods or

services causes harm, a tax should be applied to them until

the value of the tax matches the cost of the harm done –

for example, a tax on sugar should match the cost to public

health services of obesity. This is a “Pigouvian tax”, named

after Arthur Pigou, the economist who proposed the idea.

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;

however, introducing more complexity also increases

the chances of tax avoidance. Some taxes are also

levied in order to change behaviour. By taxing

something viewed as negative or unhealthy, 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 100ml are taxed at 8p per

can/carton – or 24p per litre.

Drinks with 5-8g of sugar per

100ml are taxed at 6p per can/

carton – or 18p per litre.

Milk- and fruit-based drinks,

teas, and coffees are not 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 for

undertaking a small amount of extra activity – for

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

made “at the margin” influence the behaviour of

individuals and businesses, such as whether it is worth

working longer hours.

❯❯Grey economy People who work for cash wages or

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

paying tax.

NEED TO KNOW

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