TAX: A fee charged ("levied") by a government on a product, income, or activity is called tax.

If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasigovernment agency, which tend to finance themselves largely through taxes.

INFLATION: In economics, inflation is a rise in the general level of prices of goods

and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index over time.

KINDS OF INFLATION:
briefed Wage Inflation: Wage inflation is also called as demand-pull or excess demand inflation. This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called as demand-pull inflation. This type of inflation affects the market economy adversely during the wartime. Cost-push Inflation: As the name suggests, if there is increase in the cost of production of goods and services, there is likely to be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages of laborers would raise the unit costs of production and this would lead to rise in prices for the related end product. This type of inflation may or may not occur in conjunction with demand-pull inflation. There are four main types of inflation. The various types of inflation are below.

Pricing Power Inflation: Pricing power inflation is more often called as administered price inflation. This type of inflation occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins. A point noteworthy is pricing power inflation does not occur at the time of financial crises and economic depression, or when there is a downturn in the economy. This type of inflation is also called as oligopolistic inflation because oligopolies have the power of pricing their goods and services. Sectoral Inflation: This is the fourth major type of inflation. The sectoral inflation takes place when there is an increase in the price of the goods and services produced by a certain sector of industries. For instance, an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry. Thus, the ever-increasing price of fuel has become an important issue related to the economy all over the world. Take the example of aviation industry. When the price of oil increases, the ticket fares would also go up. This would lead to a widespread inflation throughout the economy, even though it had originated in one basic sector. If this situation occurs when there is a recession in the economy, there would be layoffs and it would adversely affect the work force and the economy in turn. Fiscal Inflation: Fiscal Inflation occurs when there is excess government spending. This occurs when there is a deficit budget. For instance, Fiscal inflation originated in the US in 1960s at the time President Lydon Baines Johnson. America is also facing fiscal type of inflation under the president ship of George W. Bush due to excess spending in the defense sector. Hyperinflation: Hyperinflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a war. This can usually lead to the complete breakdown of a countrys monetary system. However, this type of inflation is short-lived. In 1923, in Germany, inflation rate touched approximately 322 percent per month with October being the month of highest inflation.

EFFECTS OF INFLATION AND ITS FACTORS ON TAXES: Even the moderate effects of inflation can cause problems because it lessens the practical advantages of using money instead of having to trade. This can be better understood if you look at the four functions that economists generally attribute to money and the way that inflation affects them Money is storage of value. If you were to sell a horse for 10 gold coins, you should be able to go back and change that money in for another horse tomorrow or the next week or the next month. When money holds its value, you feel safe saving it, and instead of selling a horse, you might be in situation in which you sell real estate or any other asset. Inflation weakens the function of money as a storage of value, because each unit of money is worth less with the passing of time. Money is a standard unit of account. If you are interested in buying a sheep, you will probably not want to take the sheep as a loan with the commitment of paying off two sheep the next year. Most likely you will get a loan and pay it in monetary terms. In other words, get a loan of one gold coin to buy your sheep, with the commitment of paying two gold coins next year. The progressive loss of the value of money during a period of inflation makes the borrowers to be less willing to use the money as standard differed payments. Suppose that a friend asks you to loan him $100, and commits to paying you $120 within a year. This seems like a good deal after all this is an interest weigh of twenty percent. But if the prices are increasing rapidly and the value of money is decreasing, how much will you be able to buy with those $120? Inflation makes people be less willing to loan out money. They fear that once the loans are paid off, the money they receive will not have the same buying value then the money loaned. This uncertainty can cause a devastating effect over the development of new businesses, that to finance their businesses are based a good amount on loans. Money is a means of exchange. Money is a means of exchange between buyers and sellers because it can be directly changed for anything else, which makes buying and selling a lot easier. In an economy of trade, an apple producer that wants to buy chocolate might see himself first forced to buy oranges and then exchange the oranges for the chocolate, because it is possible that the chocolate salesperson only wants oranges. Money however, eliminates this type of problem. But if inflation is high enough, money is no longer an effective means of exchange. During hyperinflations, frequently the economies go back to trading and this way, the buyers and sellers do not have to worry for the loss of the value of money. For example, in a healthy economy the apples sales man can sell them for money and then change this money in for chocolate. But during hyperinflation, while he is selling the apples for money and buys the chocolate, the price of the chocolate could have increased so much that he is not longer able to buy chocolate. During a hyperinflation, the economies have to go to tricky trades.

FACTORS AFFECTING TAX:

Tax Assignment Issues:

Taxes on capital in a time when capital is increasingly mobile generates demands for preferences Preserving taxes on capital based, in part, on desire for taxation on benefits theory Are taxes on capital and production (particularly business income taxes) suited to sub central jurisdictions? Leads to preferences based on incremental investment Effect in U.S. is to use apportionment to shift to a type of consumption-based tax Also affects wealth-transfer taxes and graduated income taxes

No institutions with coordination responsibility:

Limited acknowledgment of shared base and NO sharing of decisions Limited research/analysis capacity

Limited effective sub central tax base sharing mechanisms :

Some approaches to regionalism Tax increment financing Enterprise Zones or other geographic-specific programs Can lead to competition for retail locations changing nature of the economy Mobility of capital and (increasing) labor mobility Move to a knowledge/service based economy Diminished importance of resources, proximity to markets and transportation Just about everything can be done anywhere.

Business income taxes:

Including origin-based factors inapportionment Leads to increasing weight on sales/receipts factor to remove burden on capital investment Some states moving to gross receipts-based taxes as counter-measure

SUBMITTED BY SUMITTED TO : SUBJECT :

FAHAD KHAN IRFAN KHAN INCOME TAX LAW DEFINE TAX, INFLATION AND ITS KINDS,EFFECT OF INFLATION ON TAX, FOUR FACTORS EFFECTING TAX

ASSIGNMENTS TOPICS:

SUBMISSIOJN DATE :

10/06/2011