Taxation and Public Finance

Statement

A tax is a compulsory financial charge imposed on a taxpayer by the government.

• Direct tax — a tax whose burden cannot be transferred to another party (e.g. personal income tax, corporate tax).
• Indirect tax — a tax whose burden can be transferred to another party, so that the tax incidence is shared (e.g. goods and services tax, value-added tax).
• Progressive tax — a tax whose average and marginal tax rates increase as income increases.
• Regressive tax — a tax whose average and marginal tax rates are equal and do not vary with income.
• Marginal tax rate (MTR) — the proportion of additional income paid in tax, $MTR = \dfrac{\Delta T}{\Delta Y}$.
• Average tax rate (ATR) — the proportion of total income paid in tax, $ATR = \dfrac{T}{Y}$.

Notes

These terms are the vocabulary of public finance and are examined together. Government revenue is raised through taxation; government expenditure splits into government consumption (day-to-day spending, such as public-sector wages) and government investment (one-off spending on capital goods, such as building a hospital). How taxation and expenditure are then used as policy — to influence allocation, equity and the macroeconomy — is set out in the public finance concept, and their deployment to manage aggregate demand is fiscal policy.