4.3 Taxation

Question 1

What is a budget (govt)

Answer 1

It is an estimate made by the govt., of income and expenditure for a future period

Question 2

What is a balanced budget

Answer 2

when public ex = public revenuse

Question 3

What is a budget surplus

Answer 3

public ex < public revenue

Question 4

What is a budget defecit

Answer 4

public ex > public revenue

Question 5

Sources for govt revenue (apart from taxes)

Answer 5

Interest payments on loans made to private sector firms and overseas govts.

Rents from publicly owned buildings and land rented to the private sector as well as any admission charges - eg: public museums, etc

Revenue from govt agencies and SOE

Revenue from the privatization of govt owned industries and sale of other publicly owned assets.

Question 6

What are public sector borrowing requirements

Answer 6

Amount of money a govt needs each year to any finance shortfall of public revenues below total public expenditure.

Question 7

Methods for govts to take debt and raise money.

Answer 7

Sell loan stocks and securities eg: govt bonds to the private sector

Question 8

Types of debt
short, medium, long term

Answer 8

Long term debt: 10 years or more
Short: within a year
Medium: between 1 and 10 years

Question 9

2 types of GOVT debt

Answer 9

Internal: debt owed to private individuals, firms and the banking system within its economy

External: debt owed to overseas banks, residents, governments, or international organisations (eg: IMF)

Question 10

What is national debt

Answer 10

Total amount of money that is borrowed by the public sector of a country and is yet to be paid over time

Question 11

Why is national debt compared to GDP

Answer 11

Comparing national debt to GDP tells us the ability of that economy to manage and repay its debts.

Question 12

When does the burden of debt and interest payments fall

how does this relate to countries

Answer 12

When the income or ability to pay back the loan rises

As long as GPD or national income is rising faster than total debt is rising, then the burden of the debt falls.

Question 13

Reasons for govt spending

Answer 13

Provision of public and merit goods since the pvt sector doesnt

Provision of unemployment and welfare benefits

Reduce negative externalities - eg: pollution control

Social and economic infrastructure

Support and subsidize industries - eg: agriculture

Manage the macroeconomy - control inflation, unemployment, economic growth, etc.

Question 14

Effects of govt spending

Answer 14

Reduce inequality (welfare and unemployment schemes)

Higher demand - economic growth. but could also lead to inflation

Increased productivity and growth - spending on public and welfare goods

Question 15

What is tax (definition)

Answer 15

compulsory payment made to the government by all people in an economy.

Question 16

Reasons to tax

Answer 16

Finance public expenditure - largest source of govt income

To reduce consumption and production of demerit goods

Discourage importing of goods and spending on them: promotes the domestic goods. if demand of domestic goods increases, there is more employment and GDP increases. Economic growth.

Protect the environment - increased tax on productive activities that create pollution or harm the natural environment. Makes it less profitable to do so

redistribute income

Question 17

Definition of tax burden

Answer 17

proportion of tax taken from the national income of an economy.

Question 18

What are the characteristics of good tax

Answer 18

Equity
Non-distortionary
Certainty
Convenience
Simplicity
Administrative efficiency

Question 19

Explain equity (char of g tax)

Answer 19

Tax should be fair and people/firms should be taxed in accordance to their ability to pay the tax

Question 20

Explain non-distortionary (char of g tax)

Answer 20

Tax shouldn’t be too high that it starts discouraging people and firms from being more productive.

Question 21

Explain certainty (char of g tax)

Answer 21

Tax rates should be relatively stable year on year so that people and firms can roughly approximate how much they need to spend on taxes, so that they can plan their finances accordingly.

Question 22

Explain convenience (char of g tax)

Answer 22

Must be simple and easy for people to pay their taxes on a regular basis

Question 23

Explain simplicity (char of g tax)

Answer 23

Tax due should be easy to calculate for people or firms so they pay the correct amount and don’t get it wrong constantly.

Question 24

Explain Administrative efficiency (char of g tax)

Answer 24

Tax should be easy and cheap to collect. If it costs more to collect the tax than the income the tax is bringing in then there’s no point of collecting it.

Question 25

5 classifications of tax

Answer 25

Progressive
Regressive
Proportional
Direct
Indirect

Question 26

What are progressive taxes
example

Answer 26

System where the proportion of tax taken from income rises as income rises.

eg: income tax

Question 27

What are regressive taxes

eg

Answer 27

Proportion of tax taken from income falls as income rises

eg: VAT

Question 28

what is proportional tax
aka

Answer 28

System where the same proportion of income is taken regardless of the income

aka flat tax

Question 29

What are direct taxes

Answer 29

Taken directly from an individual or firm’s incomes or wealth.

Question 30

5 types of direct tax and explain

Answer 30

Income tax - paid from an individual’s income
Coorperate tax - tax paid on a company’s profits.
Capital gains tax - axes on any profits or gains that arise from the sale of assets held for more than a year.
Inheritance tax - tax levied on inherited wealth.
Property tax - tax levied on property/land.

Question 31

What happens when you increase/decrease income tax

Answer 31

Increase - when income tax is increased, consumers have lesser disposable income. Firms face lower demand which will lead to reduced production and unemployment.

Decrease - have more disposable income. demand may rise, firms may expand production. Employment may rise. At the same time inflation may also rise.

Question 32

What happens when you increase/decrease cooperate tax

Answer 32

Increase:
Businesses will have lower profits left over to put back into the business and will thus find it hard to expand and produce more. It will also cause shareholders/owners to receive lower dividends/returns for their investments which would discourage people from investing in businesses and economic growth could slow down

Reduced cooperate tax: encourage more production and investment. Companies also have more money to invest into R&D and become more efficient, etc.

Question 33

Advantages of direct tax

Answer 33

High revenue

Reduce inequalities in income and wealth - helps redistribute income well since the rich are taxed more.

Question 34

Disadv of direct tax

Answer 34

Reduces work incentives - people may chose to stay unemployed and live off benefits than earn an income and pay a high tax. People may be discouraged from being more productive since the more they earn the more they are taxed. Would lead to inefficacy and output would reduce.

Reduces enterprise incentives - corporate taxes may demotivate entrepreneurs to set up new firms

Tax evasion - corporate taxes may demotivate entrepreneurs to set up new firms. Govt would have to expend resources to catch these people and firms

Question 35

What are indirect taxes

Answer 35

taxes on goods and services sold

Question 36

Examples of indirect taxes and explain them

Answer 36

GST/VAT: these are included in the price of goods and services.

Customs duty: includes import and export tariffs on goods and services flowing between countries.

Excise Duty: tax on demerit goods like alcohol and tobacco, to reduce its demand.

Question 37

Adv of indirect taxes

Answer 37

Cost-effective: the cost of collecting indirect taxes is low compared to collecting direct taxes.

Expanded tax-base: paid by all people who consume goods and services

Can achieve specific aims: eg: excise duty to reduce consumption of demerit goods

Flexible: indirect tax rates are easier and quicker to alter/change than direct tax rates so their effects are immediate in the economy

Question 38

Disadv of indirect taxes

Answer 38

Inflationary: The prices of products will increase when indirect taxes are added to it, causing inflation.

Regressive in nature - larger burden on poor than rich since the proportion of income indirect taxes take is larger on a poor person’s income compared to a rich person’s income.

Tax evasion: high tariffs on imported goods or excise duty on demerit goods can encourage illegal smuggling of the good or black markets

Question 39

Graphs for progressive, proportionate and regressive tax
whats on x axis
whats on y axis

Answer 39

x axis - income
y axis - tax rates
Progressive - upwards sloping
proportionate - horizontal line
regressive - downwards sloping

Question 40

Impacts of taxation

Answer 40

Higher public spending

Consumers have less disposable income to spend

Affects the incentive to work

Producers will have less incentive to produce if the corporate taxes are too high.

Question 41

2 ways it affects the incentive to work
explain both

what happens when one is greater than the other

Answer 41

substitution effect - higher tax leads to lower disposable income, and work becomes relatively less attractive than leisure – workers will prefer to work less.

Income effect: if higher tax leads to lower disposable income, then a worker may feel the need to work longer hours to maintain his desired level of income – workers feel the need to work longer to earn more.

if substitution effect > income - people will work less
if income effect is greater, people will work more

Question 42

What is tax incidence

how does elasticity of product effect

Answer 42

% of tax that can be passed on to the consumer by the producer

if product is elastic : less tax can be passed on to the consumer

if product is inelastic: more tax can be passed to the consumer