13) Fiscal Policy 6: Taxation Rates And Tax Revenue

Question 1

What 2 types of taxes are there?

Answer 1

Direct and indirect

Question 2

What is a direct tax?

Answer 2

Normally charged on income earned or capital gained

Question 3

What is an indirect tax?

Answer 3

Charged on goods and services

Question 4

What 3 categories does taxation fall into?

Answer 4

Progressive, proportional and regressive

Question 5

What is a progressive tax?

Answer 5

Where those on higher incomes pay a higher percentage

Question 6

What is a proportional tax?

Answer 6

Where every tax payer pays an identical or “flat rate” of tax

Question 7

What is a regressive tax?

Answer 7

Where those on a lower income pay a higher percentage in tax

Question 8

What is the marginal rate on income tax?

Answer 8

The marginal rate is the percentage of income paid on the last pound on which you pay tax

Question 9

What is the average rate on income tax?

Answer 9

The average rate of tax is the overall percentage of your income that you pay in tax

Question 10

What are the income thresholds? (Rounded)

Answer 10

-> £0 to £12,500
-> £12,500 to £50,000
-> £50,000 to £125,000
-> £125,000+

Question 11

What are the UK income tax bands 2023?

Answer 11

-> £0 to £12,500 0%
-> £12,500 to £50,000. 20%
-> £50,000 to £125,000. 40%
-> £125,000+. 45%

Question 12

The UK tax system represents a…

Answer 12

Progressive income system, the more you earn the higher the marginal rate/ the higher your average % tax bill

Question 13

Does everyone get the first £12,500 free of tax?

Answer 13

Yes even billionaires

Question 14

What is an example of a country that uses a proportional system?

Answer 14

Eg Russia

Question 15

How does a proportional system work?

Answer 15

The marginal and average rates are always identical, assume the flat rate is 10%. You earn £20,000 you pay £2,000; earn £100,000 you pay £10,000

Question 16

What is a regressive system? What is charged?

Answer 16

Normally where fixed sums are charged

Question 17

What is an example of a regressive system in place?

Answer 17

Eg if the government set annual tax payment of £3,000 on every worker, the cleaner would pay 43% off income in tax, the footballer pays 0.03%

Question 18

Why can’t governments just raise taxes? What will they do?

Answer 18

Governments always look to maximise taxation revenue without becoming unpopular, there is a big economic debate about how best to do this

Question 19

What is the Laffer Curve ? (controversial)

Answer 19

It suggests that increasing tax rates above a certain level will actually reduce tax revenue

Question 20

Why in theory does the Laffer Curve work? What is it trying to show?

Answer 20

It shows that increasing tax rates above a certain level will actually reduce tax revenue due to higher tax rates becoming a disincentive for workers to work or firms to maximise profits

Question 21

What is an example of firms becoming disincentives to maximise profits due to high tax?

Answer 21

They might persuade workers to go abroad or to choose benefits instead; companies might move to other countries or else bend over backwards to find ways of avoiding tax

Question 22

Who agrees that the Laffer Curve idea is fundamentally correct?

Answer 22

Almost everyone agrees

Question 23

However, the location of the… is very contentious on the Laffer Curve

Answer 23

Maximum point

Question 24

Why is the location on the maximum point very contentious on the Laffer Curve?

Answer 24

It depends on your politics

Question 25

Where do libertarians think the peak rate is on the Laffer Curve?

Answer 25

They think the push rate is low - eg 25%

Question 26

What are libertarians?

Answer 26

Free market/laissez faire believers

Question 27

Where do social democrats/ left leaning politicians think the peak rate is on the Laffer Curve?

Answer 27

They would argue that the Laffer Curve peak is much higher eg 70%

Question 28

What do the vast majority of employers pay,? (Tax)

Answer 28

The basic rate, 20%