Labour Market Essay
There are two different types of tax, direct tax and indirect tax, and the UK has a tax system that involves both of these types of tax. Direct taxation is taxation on income, and is often taken out of a pay packet before the worker receives their income. This type of tax is said to be progressive, because the proportion of income paid in tax rises as income rises. Income tax is the main system of direct taxation in the UK and, at present, no tax is paid on approximately the first £4500 of income. 10% is then paid on approximately the next £1600. 22% tax is then paid on the rest of the income up to about £28500, and 40% tax is paid on anything above this. This has changed significantly over the last 20-30 years. There used to be a top tax rate of 98% on real income of about £150000 at today’s values. There also used to be an 83% tax bracket in the place of today’s 40% tax bracket and the base rate has also fallen to today’s value of 22%. Gift tax and tax on companies profits are other types of direct taxation. Indirect taxation is taxation on expenditure, and is said to be regressive because the proportion of income paid in tax falls as income rises. The two types of indirect tax are per unit tax and ad valorem tax. Per unit tax is a set amount of tax, which the wholesaler must pay the government on each unit sold. This has increased significantly in recent years in the UK, especially on things such as Cigarettes, Alcohol and Petrol. Ad valorem tax appears mainly in the form of VAT (Value Added Tax) in the UK and is currently 17.5% of the price of the item. Obviously, the amount of tax paid increases as the price of the item increases and VAT is present on a large amount of goods in the UK. Income comes from ownership of the factors of production, and the distribution of income shows how income is distributed throughout the people within the economy. Some economists would argue that an unequal distribution of income is essential for an economy to function properly, because without it there would be no incentive to work harder. If people can earn a greater income by working harder, they usually will, and this could increase production within the economy, leading to economic growth.