Sources of Government Income

1. Sources of Government Income The government needs money to pay for public expenditure . Revenue can be raised through taxation, national insurance contributions, borrowing, charging for services or by selling off state-owned assets.

2. Government Revenue Largest source of government revenue: Income TaxSmallest source of revenue: Capital TaxesCouncil Tax: Local tax on property %

3. Government Revenue • Income Tax 10%, 22%, 40% • VAT 17.5%, 0% for zero rated goods • Capital Gains Tax Gains over £7,200 are taxed at the individuals income tax rate and companies pay corporation tax on their capital gains • Corporation Tax 10% 20%, 30% • Excise Duty Beer 26p, cigarettes (20) 181p duty plus 87p ad valorem, wine (75cl) 116p, spirits (75cl) 548p, petrol (litre) 51p, unleaded 49p, diesel 49p Types of Taxation

4. Taxation • To raise money to pay for government spending. • To discourage people from buying harmful goods such as cigarettes. • To influence the level of total demand in the economy. • To redistribute income from the rich to the poor. Aims of Taxation

5. Taxation • A tax should be certain so that everyone knows the amount, method and time of tax payment. • A tax should be convenient so that tax collection is at a time and in a form suitable to the payer. • A tax should be economical with the cost of collection representing only a small part of the revenue raised. • A tax should be equitable (fair) so that wealthy people pay more than poor people. • A tax should not act as a disincentive and stop people from working. • A tax should be flexible so that the government can use tax changes to help control the level of demand in the economy. Principles of Taxation

6. Taxation • Income tax. Everyone is given a tax-free personal allowance (amount) above which additional earnings are taxed at an increasing rate. • Value added tax (VAT) is a tax on spending. 17.5 per cent is added onto the selling price of most non-essential goods and services. • Duties are taxes on the sale of luxury goods. A fixed amount is added to the selling price. • Council Tax is a local tax on property. All properties are valued and the amount of council tax paid depends on the value band which the property falls into. • Corporation tax is a tax on company profits. • Petroleum revenue tax is a tax on oil taken from the North Sea. • Inheritance tax is a tax on the transfer of money and property. Main Types of Taxation

7. Taxation • Direct taxes are paid straight to the Inland Revenue.They are therefore taxes on income. • Indirect taxes are first collected by the seller and then passes on to Customs and Excise. These taxes are therefore taxes on expenditure. Method of Collection

8. Taxation • Progressive, where the percentage of income taken in tax rises as income rises. Income tax in an example of progressive taxation. • Regressive, where the percentage of income taken in tax falls as income rises. Rates are an example of regressive taxation. • Proportional, where the percentage of income taken in tax stays the same as income rises. VAT is an example of proportional taxation. Method of Collection

9. Budgets • The Chancellor of the Exchequer is the minister of finance in charge of the Treasury. The Chancellor announces how much the government is going to spend over the next twelve months, sometime in November. • The government states how it is going to raise the money to pay for its expenditure at the same time in the Budget. See:Table 13.1Advantages and disadvantages of various taxes. Calculation of the Budget

10. Budgets • A reflationary or deficit budget where government spending is greater than government income. Reflationary budgets increase total demand within the economy. • A deflationary or surplus budget where government income exceeds expenditure and total demand is falling within the economy. • A neutral budget where government income and spending are the same and total demand in the economy remains constant. Types of Budget

11. Government Borrowing • Selling National Savings certificates and Premium Bonds. • Selling Treasury bills which are IOUs which will be bought back in ninety-one days; time. • Selling securities, which are IOUs paying interest yearly which will be bought back sometime in the future. Securities are sometimes called gilts, stocks or bonds. Public Sector Net Cash Requirement If the government spends more than its received income it will have to borrow the difference. The amount the government needs to borrow in a given time period is called the public sector net cash requirement (PSNCR). The PSBR is met by:

12. Government Borrowing • Interest has to be paid to overseas citizens, so that the balance of payments suffers. • Taxes have to be increased to meet interest payments Public Sector Net Cash Requirement The total amount owed by the government to UK citizens and foreigners at a particular moment in time is called the national debt. The money raised may have been spent on capital goods which increase our ability to produce goods. Interest has to be paid on the debt. A large national debt is a problem if:

13. Reference These pages are based on original material written by Richard Young of Wood Green School Witney. Content has been updated and diagrams added by Biz/ed.