1. Taxes and the
underground
economy

2. What are taxes?
A tax is a financial charge imposed on
individuals or businesses by the
government for use in public spending.
What are taxes?What are taxes?

3. Who pays taxes?
• Individuals
Anybody who's been earning something (from
one's income or some other means) gains the
responsibility of paying taxes.
• Businesses
Whether you're running a corporation or an
independent business where you're self-
employed, taxes have to be paid. The form of
business you operate determines what taxes you
pay and how you pay them.

4. Why do we pay taxes?
Taxes are used to fund projects
that can benefit society as a
whole.
http://www.youtube.com/watch?
v=xJsm4ySD0Ps
Taxes are used to fund projects
that can benefit society as a
whole.
http://www.youtube.com/watch?
v=xJsm4ySD0Ps
Taxes are used to fund projects
that can benefit society as a
whole.
http://www.youtube.com/watch?
v=xJsm4ySD0Ps

5. Here are some uses of taxes:
 National defence / expenditures on war
 Welfare and public services:
-public education
-health care systems
-pensions
-unemployment benefits
-public transportation
 Energy, water and waste management
 Protection of property
 Building of roads
 Enforcement of law / public order
-police
-firefighters

6. Types of taxes:
Ad valorem
Environment affecting tax
Capital gains tax
Consumption tax
Corporation tax
Excises

7. Inheritance tax
Poll tax
Property tax
Retirement tax
Sales tax

8. Tariffs
Toll
Transfer tax
Value added tax
Wealth tax

9. Income tax
Tax rates around the world
Income tax
Country Corporate Individual
Argentina 35% 9-35%
Belgium 33.99% 25-50%
Bulgaria 10% 10%
China 25% 5-45%
Germany 30-33%(effective) 15-45%
India 30-40% 10-30%
Japan 30% 5-40%
Latvia 15% 25%
Mexico 28% 0-28%
Morocco 35% 0-41.5%
Romania 16% 16%
Russia 24% 13%
Spain 30% 24-43%
Sweden 28% 0-56%
U.K. 30% 0-40%
Ukraine 25% 15%
U.S.A. 15-35% 15-35%

10. Taxes and efficiency
One tax system is more efficient that another if it
raises the same amount of revenue at a smaller
cost to taxpayers.
What are the costs of taxes to taxpayers (beside
the tax payment itself) ?
The deadweight losses that result when taxes
distort the decisions that people make
The administrative burdens that taxpayers bear
as they comply with the tax laws

11. Deadweight losses
Taxes distort incentives
Taxes discourage people from saving
Consumption tax
Administrative burden
Filling-out tax forms
Hiring lawyers and
accountants

12. Lump-some taxes
Taxes that are the same amount for every
person.
The most efficient,
but…
Not equitable!

13. Taxes and equity
The benefits principleThe benefits principle
People should pay taxes based on the
benefits they receive from government
services.
The ability to pay principle
Taxes should be levied on a person
according to how well that person can
shoulder the burden.

14. How taxes affect market outcomes?
Price
Supply
Size of tax(T)
Price buyers pay
Price without tax
Price sellers receive
Quantity sold (Q) Demand
Quantity Quantity Quantity
with tax without tax
Tax revenue
(T * Q)

15. Ice-cream example:
Ice cream
Seller
Buyer
Bowl

16. To sum up:
Taxes discourage market activity. When a
good is taxed, the quantity of the good
sold is smaller in the new equilibrium.
Buyers and sellers share the burden of
taxes. In the new equilibrium, buyers pay
more for the good, and sellers receive
less.

17. Tax resistence
Tax avoidance
-country of residence
-double taxation
-legal entities
Tax evasion
-illegal income and tax evasion
-evasion of customs duties
-smuggling
-evasion of value added tax (VAT)

18. Unreported employment
“working under the table”
Performance of employment that is not reported as
required by law to the appropriate local, state or
provincial, or national government agency.
Common jobs that are performed under the table:
 Domestic work (housekeeping, babysitting, etc)
 Contracting work
 Taxicab service (also known as hacking)
 Various types of self employment

19. Underground economy /
black markets
Some examples of underground economic
activities:
 Transportation providers
 Illegal drugs
 Prostitution
 Weaponry
 Alcohol and tobacco
 Copywrighted media

20. Famous tax evaders
"I make my money by supplying
a public demand. If I break the
law, my customers who number
hundreds of the best people in
Chicago, are as guilty as I am.
The only difference is that I sell
and they buy. Everybody calls
me a racketeer. I call myself a
businessman."
Al Capone (alias Scarface)

21. Theories:
Taxation as slavery
Voluntary taxation
Optimal taxation theory