The Tax Research glossary seeks to explain the terms used on this blog that refer to more technical aspects of economics, accounting and tax. It recognises that understanding these terms is critical to understanding the economic issues that affect us all the time.
Like the rest of the Tax Research blog, this glossary is written by Richard Murphy unless there is a note to the contrary. It is normative approach and reflects post-Keynesian, heterodox economic opinion with a bias towards modern monetary theory. The fact that many items in that sentence are hyperlinked shows that they are explained in the glossary.
The copyright notices pertaining to the Tax Research blog apply to this glossary.
The glossary is designed to achieve three goals:
- It seeks to provide a short, hopefully straightforward, definition of what a term might mean.
- It then seeks, when appropriate, to explain what the term means within the context in which it is used. This is meant to elaborate the definition to add to understanding.
- It then critiques the term, explaining, if appropriate, what the weaknesses inherent in the term or the situation it describes are. The aim here is to empower the reader to understand the issues behind the nonsense that most professions create around their activity to provide them with a mystique that they rarely deserve and which often hides what they are really up to.
The glossary is not complete. It will grow over time. If you think there are entries that need adding please let me know by emailing firstname.lastname@example.org. Please also feel free to suggest edits. The best way to do this is to copy an entry into Word and then send me a track-changed document indicating the changes that you suggest.
Because of the way in which it is coded this glossary automatically cross refers entries within itself and to the blog that it supports and within the glossary itself but if you think a link is missing please let me know.
Finally, if you like this glossary then you might like to buy me a coffee. It has required the support of a fair few to write it. You can do so here.
- Direct taxation
- Dirty Money
- Discretionary trusts
- Disposable income
- Distribution costs
- Double Entry
- Double tax agreement
A person who owes an agreed sum to another person, usually stated in terms of a monetary value.
Depreciation is an accounting measure that is intended to represent the gradual decrease in the value of a tangible fixed asset over time due to factors such as its wear and tear in use, or obsolescence. Depreciation is intended to allocate the cost of an asset over its useful life for accounting purposes.
In practice all the methods used for calculating depreciation are approximate, at best, introducing one of the many elements of approximation commonplace in all forms of financial reporting based on accruals basis accounting standards.
See also amortisation.
Direct taxation is charged on profits, income and gains i.e. the residual benefits that accrue to the taxpayer from a transaction after all the tax-allowable costs of generating that income have been offset against it. Examples of direct are income taxes, corporation taxes, taxes on capital gains and taxes on gifts.
The great advantage of these taxes are that they tend to be easier to make progressive than indirect taxes.
A progressive tax is one where the rate of tax charged increases as the amount of income or gain subject to that tax charge increases in relation to a specific taxpayer.
Discretionary trusts permit payments to be made to almost anyone at the trustees' discretion, which means that the identity of the likely beneficiaries of those trusts can remain a secret for a long period after their creation.
In practice, most discretionary trusts nominate a charity as a potential beneficiary whilst apparently giving trustees the discretion to nominate anyone else.
In practice, few settlors of such trusts have confidence in their trustees and normally require that those trustees follow a ‘letter of wishes' that has been provided by the settlor instructing them as to who they are to pay money to, when and how. There is, therefore, very often very much less discretion about who actually benefits from those trusts than their trust deeds would suggest is the case.
Disposable income refers to the amount of money that an individual or household has available to spend or save after deducting taxes and other essential expenses, such as rent or mortgage payments, utilities, and necessary food and clothing. It represents the portion of income that can be used at one's discretion.
Disposable income is an important economic indicator as it reflects the financial resources that individuals have to support discretionary consumption and contribute to economic growth.
Disposable income can vary significantly among individuals and households based on factors such as income level, employment status, location, family size, and government policies (such as tax rates and social benefits). It is influenced by both personal circumstances and broader economic conditions.
A person's place of domicile is the country identified as that person's natural country of origin even if that person has not been resident there for extended periods of time.
The domicile concept is important in determining who pays tax in some countries, and most especially in the UK where a “non-domiciled” person need not necessarily pay tax on their worldwide income when domiciled people must.
This ability to defer tax using the concept of domicile is now restricted in the UK, and after seven years of tax residence has to be paid for (subject to detailed rules). The status expires for tax purposes in the UK when a person has been tax resident in the UK for fifteen years out of any twenty-year period. However, for the very wealthy this remains a very attractive tax option for a considerable period of time. This explains why the UK remains a tax haven for wealthy people.
Double entry is the system of recording income and expenditure and assets and liabilities for book-keeping purposes.
Book-keeping prepares what is called a general ledger that records all the transactions undertaken by a reporting entity. The old term for this ledger was the nominal ledger.
The principle that underpins double entry book-keeping is that for every transaction that a reporting entity undertakes there is also a reaction. There must, therefore, be two entries in its general ledger to record any transaction.
For example, if the reporting entity makes a sale then there is also an increase in its cash balances if the sale was for cash or in its trade debtor balances if the sale was on credit terms. One side of each transaction is called a debit and the other side is called a credit. The names are in themselves meaningless and can be the cause of confusion.
Credits are used to record:
- Sales and other income received e.g., interest.
- Liabilities of all sorts whether current liabilities (such as trade creditors) or long-term liabilities such as borrowings, or provisions.
- Share capital.
- Profits and gains when they form part of shareholder funds on the balance sheet.
- The reduction in any debit balance.
Debits are used to record:
- Assets of all sorts.
- Losses when they form part of shareholder funds on the balance sheet.
- The reduction of any credit balance.
There is literally nothing more to double entry book-keeping than these very basic rules, despite which many people find it confusing.
This is most especially because of the last point noted in each category. Sales are recorded as credits in double entry book-keeping, but debits can also appear in a sales account, for example when a sale is cancelled and a credit note (which confusingly is recorded as a debit in double entry book-keeping) is issued.
Similarly, assets are recorded as debits. So a car appears as such in a fixed asset account, but when it is sold the record of ownership has to be cancelled by a credit entry (the recording of the sale of a fixed asset requires a particularly confusing set of double entries).
The point to note is that learning double entry is like learning the grammar of a language, but one where there appear to be plenty of irregular entries until the language is mastered. Mastering that language involves understanding that there is no value judgement applied to whether any entry is a debit or a credit. In themselves those terms are meaningless but it often takes time to overcome the feeling that one must be inherently superior to the other.
Accounts are prepared on the basis of the entries in the general ledger that are themselves based on double entry book-keeping. By definition all accounts must balance as a result: double entry requires that. As a result a balance sheet must balance.
The term ‘balancing the books' dates back to the era when manual addition was used to calculate the balances in general ledgers and errors were commonplace. The adoption of this term for government accounting, suggesting that when the government claims to borrow it has unbalanced books, makes no sense in that case and is another example of the so-called 'household analogy' in action.
It is important to note that a great deal of government accounting is not prepared on the basis of double entry. Very few Office for National Statistics reports on what are claimed to be the government's accounts are prepared 9n this basis. Estimates of GDP and the national debt are amongst the key accounting issues on which they ignore the disciplines of double entry accounting. Whether the resulting data is true and fair is open to serious doubt as a consequence.
Double tax agreement
A double tax agreement or treaty (DTA) is an agreement between two sovereign states or jurisdictions to ensure, as far as possible, that income arising in one and received in the other is taxed only once.
A DTA usually includes rules to define the residence and source bases of tax and limits on withholding taxes.
Whilst there are aspects of DTAs that are generally beneficial, they are not without their problems. In particular, those based on the OECD model tend to favour developed countries over those in the Global South as they have a bias towards residence basis taxation and against source basis taxation. The United Nations model agreement is better in this regard.
In addition, some old DTAs, such as that between Mauritius and India, provide tax loopholes (in this case, on capital gains) that are costly to one party (in this case, India). Such agreements require renegotiation.