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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 10
Goods and services tax is tax paid for goods and services
o
The scope of the charge
If goods are worth $4, and GST is 15%, then the retailer will charge $4.60 and has an output tax of
$0.60 to pay to the government
However, the retailer will get an “input credit” in respect of the GST they have paid – when they
purchase raw materials to produce the goods, the cost of raw materials will have included GST
The retailer will only pay GST on the value it has added
o
There is a difficult disncon between exempt supplies and zero-rated supplies
The GST Act provides for some supplies of goods and services to be exempt and some to be zero-
rated
Example
Residenal rent and most banking services are exempt – if you are renng a house, the
landlord is not obliged to pay GST as it is exempt
The landlord does not get input credit either – if they pay for plumbing, they will not
get a refund for the GST paid for the plumbing services
Exports are zero-rated – you are not exempt, but you pay tax at a rate of $0
The purpose of this is that the exporter gets the input credit
When a company exports its goods, the company does not have to pay any output
tax and gets a refund from the government of the GST it has paid in the goods and
services it purchased
TAX ADMINISTRATION
Income tax is collected by the IRD
GST is mostly collected by the IRD and in some circumstances the Customs Department
The IRD has broad powers to make you answer quesons and look at bank records etc.
There are penales in not paying tax
There are rulings where you can ask the Tax Department in advance what the tax consequences of a parcular
transacon is etc.
Page 11
TAX POLICY AND THEORY
ADAM SMITH
Adam Smith effecvely invented the science of economics
o
Economics is important to tax, because tax is largely about money – in the course of designing a tax system,
you need to take into account how the economy works
o
Smith worked for 10 years on his book “The Wealth of Naons” and finished it in 1776
o
It was also in 1776 that a group of American aristocrats signed and published the
Declaraon of
Independence
. The slogan of their revoluon was “
No taxaon without representaon
”
The American colonies did not want to pay taxes to a government in which they had no say
BASIC ECONOMIC THEORY
Smith’s book marked the foundaon of the science of economics, and economics changed the world – in parcular, it
changed the way governments operate and also the way business operates
Smith’s central idea is that markets operate for the common good – if there is a market in which individuals voluntarily
trade with one another, then it will benefit people generally, even though each individual is movated solely by his own
self-interest
o
Example: the butcher, the brewer and the baker
If we assume that the only products being manufactured in this society is beef, beer and bread
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,
but from their regard to their own self-interest.” – in other words, we get our beef, our beer, and our
bread not as a result of the altruism of the butcher the brewer and the baker, but as a result of their
selfishness
o
Therefore, Smith’s idea of the market is based on a parcular view of human nature:
First, we generally have “a desire of beering our condion”
Secondly, we have a natural tendency to trade (buy and sell)
o
At this point, we run into an important objecon to Smith’s analysis:
Most people are prepared to accept the two concepts of human nature, but his theory assumes that
people are movated enrely by monetary gain – this seems a narrow and incomplete concepon of
human nature
In reality, Smith did not regard humanity as movated enrely by self-interest – another book (“The
Theory of Moral Senments”) emphasized that people are able to sympathize with others, but his
economic theory generally ignores this and concentrates on self-interest
Therefore, Smith’s theory and economics is based on a flawed noon of human nature
o
However, it does not maer whether people are selfish or not because the usefulness of Smith’s theory
doesn’t depend on whether its basic assumpon is
realisc
– its usefulness is based on its extraordinary
explanatory power (because it makes it possible to make sense of the past and also to predict the future)
This is called the “as if hypothesis” – for economics to be useful, it is not necessary to assume that
people are movated by self-interest; all we have to assume is that they behave
as if
they are
movated by self-interest
o
In any event, returning from Smith’s assumpons to his basic theme, he says that people entering into and
carrying out transacons in a free market add to the collecve well-being
THE “INVISIBLE HAND” OF THE MARKET AND THE DIVISION OF LABOUR
The concept of
the invisible hand of the market
:
o
The parcipant in the market “neither intends to promote the public interest, nor knows how much he is
promong it … he intends only his own gain, and he is in this, as in many other cases,
led by an invisible hand
to promote an end which was no part of his intenon.”
o
The invisible hand induces people to get up in the morning and make not what they want, but what other
people want
o
Also, the invisible hand induces people to produce only as much of a thing as other people want; and only at a
price that other people are prepared to pay
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