CLASS 1.1

Important concepts

Entities – tax versus legal
• Tax entities o People, partnerships, joint venture, companies … are considered to be entities for the purposes of calculating income tax.
• Legal entities o Companies, which have separate legal personalities, are legal entities.

Income flows
• Income should be considered as a cash flow stream, where timing is important.
• The question is, when the income recognised as earned or deducted (because tax delayed is tax denied)?

CLASS 1.2

Patterns of taxation

Income tax
• Income tax is a progressive system.
• Income tax is mainly a rich person’s tax once franking credits are taken into account to produce an “effective tax rate”.
• Wealthy people pay less tax overall by reducing their tax burden through using the lower rate paid on capital gains and other tax minimisation schemes.
• Total tax as a percentage of GDP is lower in Australia compared to many other countries across the world. However, these results must be considered in light of the high level of income (where it may not be as much of a burden to pay high taxes where there is high income) and quality of public goods provided in counties such as Sweden (which has the highest total tax rate as a percentage of GDP).

Justifications for taxation

Why do we need taxes?
• Public goods argument: the government can provide some benefits to society better than anyone else. Examples include defence, and law and order.
• Market failure (merit goods) argument: the public does not spend enough for their own benefit. o Examples include education where some people do not emphasise tertiary education and therefore, do not consume it. Education is considered a merit worthy of funding. o In the public health area, eradication of disease is more effective when done on a mass and co-ordinated scale.
• Redistributive justice: