Survival Of Small Firms

INCOME TAX as an example of tax:

Outcomes from the section:

Differentiate between personal Y tax base & comprehensive Y tax base

Explain progressiveness of personal Y tax

Discuss economic effects of personal Y tax: emphasize efficiency

INCOME TAX: topics

The comprehensive income tax base

Personal income tax base

Personal income tax rate structure

Economic effects of personal income tax

INCOME TAX: definitions

Tax bases mentioned so far: income, wealth and consumption

Here we focus on income

What is income? by sources and by uses

Uses side definition: the net increase in the power to consume over given period: Y = C + S

INCOME TAX: definitions

From sources side:

Anything that makes consumption possible:

i.e. wages, interests, capital gains profits, remittance, etc.

This is comprehensive definition of Y as it reflects purchasing power

INCOME TAX: definitions

But governments tax these sources separately:

For instance Y to individuals = personal income tax, companies = company tax, capital value gains = capital gains tax, etc.

In addition income can be taxed as it accrues (i.e. before being realized)

e.g. capital gains tax on asset before it is sold

This is administratively hard and may cause cash flow problems

INCOME TAX: definitions

Personal income tax:

Gross income is starting point

Wages, rents, royalties, etc. excl. capital

From gross income are exemptions

Then net income:

After all deductions are made (e.g. medical)

We have taxable income, at an applicable rate

INCOME TAX: definitions

In S.A. government applies tax loopholes in comprehensive income

i.e. exclusions, exemptions, deductions, rebates

These affect size of base:

INCOME TAX:liability

Working out income tax liability:

A. Comprehensive income => minus exclusions (e.g. capital gains)

B. Gross (cash) income => minus exemptions (e.g. dividends)

C. Net income => minus deductions (medical)

D. Taxable income => (minus tax according to brackets)

E. Gross tax liability =>