ACCA ATX ^UK Syllabus A6. Value Added Tax - The purpose of tax - Notes ^{1 / 2}

Tax can be used by governments to affect:

1. Inflation

   Higher tax levels should decrease inflation

2. Employment

   Higher tax levels should increase employment (if spent by governments in the right way!)

Tax can also be used by governments to affect businesses and individuals:

• It encourages:

  - saving by offering NISAs (new individual savings accounts)

  - charity donations by offering Gift Aid tax relief

  - new businesses by offering investment tax relief

• It discourages: 

  - motoring by fuel duties

  - drinking alcohol by imposing high duties etc

Social Justice Purpose

This can be done through Progressive taxation:

This simply means the higher earners pay a higher % of their income as taxes - thus redistributing the wealth in society from the rich to the poor

So, income tax is an example of a progressive tax

The opposite of this is Regressive taxation where higher earners pay a lower % of their earnings as tax

Ad Valorem Principle

Here everyone pays the same % of tax regardless of income

- e.g., VAT on a computer is the same regardless of your income

The final form of tax is Proportional Taxation

This is where the tax levels (% of earnings) remain the same regardless of income levels