13) Fiscal Policy 6: Taxation Rates And Tax Revenue Flashcards
What 2 types of taxes are there?
Direct and indirect
What is a direct tax?
Normally charged on income earned or capital gained
What is an indirect tax?
Charged on goods and services
What 3 categories does taxation fall into?
Progressive, proportional and regressive
What is a progressive tax?
Where those on higher incomes pay a higher percentage
What is a proportional tax?
Where every tax payer pays an identical or “flat rate” of tax
What is a regressive tax?
Where those on a lower income pay a higher percentage in tax
What is the marginal rate on income tax?
The marginal rate is the percentage of income paid on the last pound on which you pay tax
What is the average rate on income tax?
The average rate of tax is the overall percentage of your income that you pay in tax
What are the income thresholds? (Rounded)
-> £0 to £12,500
-> £12,500 to £50,000
-> £50,000 to £125,000
-> £125,000+
What are the UK income tax bands 2023?
-> £0 to £12,500 0%
-> £12,500 to £50,000. 20%
-> £50,000 to £125,000. 40%
-> £125,000+. 45%
The UK tax system represents a…
Progressive income system, the more you earn the higher the marginal rate/ the higher your average % tax bill
Does everyone get the first £12,500 free of tax?
Yes even billionaires
What is an example of a country that uses a proportional system?
Eg Russia
How does a proportional system work?
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
What is a regressive system? What is charged?
Normally where fixed sums are charged
What is an example of a regressive system in place?
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%
Why can’t governments just raise taxes? What will they do?
Governments always look to maximise taxation revenue without becoming unpopular, there is a big economic debate about how best to do this
What is the Laffer Curve ? (controversial)
It suggests that increasing tax rates above a certain level will actually reduce tax revenue
Why in theory does the Laffer Curve work? What is it trying to show?
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
What is an example of firms becoming disincentives to maximise profits due to high tax?
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
Who agrees that the Laffer Curve idea is fundamentally correct?
Almost everyone agrees
However, the location of the… is very contentious on the Laffer Curve
Maximum point
Why is the location on the maximum point very contentious on the Laffer Curve?
It depends on your politics
Where do libertarians think the peak rate is on the Laffer Curve?
They think the push rate is low - eg 25%
What are libertarians?
Free market/laissez faire believers
Where do social democrats/ left leaning politicians think the peak rate is on the Laffer Curve?
They would argue that the Laffer Curve peak is much higher eg 70%
What do the vast majority of employers pay,? (Tax)
The basic rate, 20%
