Case study 1
Mr x is a¬†resident in¬†country A, and¬†he has a¬†wife and¬†two children.
- Salary¬†‚Äď Taxable
- Consulting fee made once¬†‚Äď Non-taxable if made once.
- Bank interest payment¬†‚Äď usually not¬†taxable?
- Capital gain from selling market shares¬†‚Äď Taxable usually.
- Rent payments or¬†inheritance¬†‚Äď Taxable in¬†AT, but¬†typically not.
- Lottery wins¬†‚Äď in¬†Russia, yes, but¬†generally not¬†taxable. Professional players must pay taxes.
Taxable income: typical sources
- employment¬†‚Äď most popular type of¬†income
- agriculture¬†‚Äď not¬†a¬†high piece in¬†developed countries
- investment income
- use of¬†intangibles (royalties)
- Capital gains = sales¬†‚Äď cost.
Do all sources of¬†income suffer the¬†same tax burden?
For¬†investment income, we have a¬†27.5 percent tax.
For¬†real estate, we have a¬†30% tax.
Income tax rates
- there is no¬†natural rate of¬†tax.
- It depends only on¬†policy.
- People usually mean income tax when saying about tax rates.
- Income taxes take a¬†considerable part with nothing in¬†return. It creates anger.
Income taxpayers and¬†nontaxpayers are voters. So the¬†social needs have to¬†be solved by¬†taxes.
Ways to¬†design rates
- Flat rate¬†‚Äď the¬†easiest to¬†count.
- Progressive rate increases with higher income.
If you have >1m‚ā¨ per¬†year in¬†Austria, you pay 55% of¬†tax; >100k‚ā¨ 50% of¬†tax.
Political parties use the¬†lowering of¬†low-income taxpayers (30-40% of¬†the¬†population) even though they pay too low taxes.
How is income tax levied?
- on¬†annual bass
- Taxpayer files a¬†tax return
- The¬†tax office assesses the¬†tax due
by¬†withholding tax (tax levied by¬†payor), e.¬†g., for:
- Employment income
- Investment income
- In¬†some countries: capital gains
Withholding taxes are outsourcing for¬†tax regulators. Withholding tax makes
The¬†employer pays all the¬†taxes instead of¬†the¬†employee.
Tax administration then always gets money at¬†a¬†time without minor problems as¬†in¬†case if employee paid it.
Withholding taxes employers pay monthly.
Pros and¬†cost of¬†withholding taxes
- WHT secures tax revenues
- WHT is efficient for¬†tax administrations (but¬†creates risks for¬†payors)
- WHT usually works on¬†a¬†gross basis (no¬†deductions from WHT base)
Case study: which expenses are tax-deductible?
Mr. X has made the¬†following expenses in¬†Y1:
- ‚ā¨1000 for¬†expert literature (for¬†his job)¬†‚Äď Tax-deductible, because the¬†book can be helpful only with his job
- ‚ā¨500 for¬†the¬†business suit¬†‚Äď generally tax-deductible, but¬†in¬†some cases, the¬†government can say that you bought these clothes for¬†everyday use. Example with McDonald‚Äôs outfit¬†‚Äď Tax-Deductible, because no¬†one uses this outfit, not¬†on¬†work.
- Travel cost to¬†the¬†work¬†‚Äď Can be tax-deductible and¬†can be not, depends on¬†policies.
- Renovation of¬†the¬†apartment last year with¬†‚ā¨0 for¬†rent¬†‚Äď renovation is made once in¬†10-20 years, so this year was nothing made, so no¬†taxes.
- A¬†donation to¬†the¬†Red Cross of¬†‚ā¨200¬†‚Äď Is not¬†tax-deductible. It is not¬†based on¬†business will but¬†the¬†will of¬†a¬†person. Sometimes policies incentivize donations in¬†specific organizations.
Is income tax based on¬†a¬†gross or¬†net basis?
Tax, commonly based on¬†net income:
- as¬†a¬†consequence of¬†the¬†ability to¬†pay principle
- Expenses related to¬†items of¬†taxable income are generally tax-deductible
Tax, based on¬†gross taxation
- In¬†scheduler systems for¬†specific categories of¬†income
- Where WHTs are applied¬†‚Äď then voluntary tax assessment could be possible.
Specific types of¬†expenses might be declared non-deductible, e.¬†g.,
- if relating to¬†private life
- if relating to¬†non-taxable income
- criminal fines, penalties
Sometimes generally, non-deductible are specifically made deductible:
- Various policy reasons for¬†granting deductions
- E.g., housing loan, interest, specific donations, etc.
Mr. X has family-related expenses in¬†Y1:
- Child support¬†‚ā¨500¬†‚Äď
- School fees¬†‚ā¨5000
Overall, Mr. X covers the¬†general cost of¬†living for¬†his entire family.
Income tax and¬†family situation
Various design options to¬†reflect family situations for¬†income tax purposes.
Individual taxation¬†‚Äď not¬†reflected at¬†all:
- Instead, typically, tax credits (or¬†other family subsidies) are granted.
- Overall, family income irrelevant to¬†progressive tax rates.
Family/household taxation¬†‚Äď overall family income as¬†a¬†tax base:
-Divided by¬†the¬†number of¬†family members (e.¬†g., was in¬†France)
- Strong lowering effect on¬†progressive tax rates.
Marriage split¬†‚Äď Family taxation for¬†married couples:
A¬†limited form of¬†family taxation
- Equal treatment of¬†unmarried couples/singles
- All policy options have different effects