4.5 - The role of the state in the macroeconomy

Question 1

Define direct tax ang give examples of who pays it and its purpose

Answer 1

= A tax that is levied on income, wealth and profit.

INCOME TAX:
- Employee, sole traders and partnerships
- Raise revenue to fund govt spending

CORPORATION TAX:
- LTDs and PLCs (Limited companies)
- Raise revenue to fund govt spending

NATIONAL INSURANCE CONTRIBUTIONS:
- Employee & employer
- Raise revenue to fund certain state benefits, such as the state pension and maternity allowance.

CAPITAL GAINS = A levy on the profit made from the sale of investments (with increasing value) such as stock shares.
- Investors

Question 2

Define progressive tax (direct)

Answer 2

Where those who are on higher incomes pay a higher marginal rate of tax therefore they pay a higher percentage of their income on tax.

Question 3

Define regressive tax (indirect)

Answer 3

Where a smaller proportion of income is paid in tax as incomes of the taxpayer rises and vice versa.

Comparatively, those on lower income have limited disposable income so their buying power is limited.

(The tax rate remains constant regardless of income).

Question 4

Define proportional tax

Answer 4

Where the proportion of income paid on tax remains constant whilst the income of the taxpayer changes. For example, sales and real estate tax.

Question 5

Explain the effect on incentives to work from changes in tax rates

Answer 5

The supply of labour is relatively elastic when determined by tax.

• A reduction in tax rate on income will lead to a significant increase in work as individuals work longer hours, accept promotions and more people join the
  workforce.
• The higher the tax rate on income the incentive for the unemployed to seek work or for existing workers to work overtime falls significantly.

Question 6

Explain the effect on tax revenues from changes in tax rates

Question 7

Define public expenditure

Answer 7

Govt spending which represents a significant proportion of AD in many economies.

Question 8

Define current expenditure

Answer 8

The daily payments required to run the govt and public sector. For example, the wages/salaries of employees and the payments for goods/services.

Question 9

Define transfer payments

Answer 9

Payments made by the govt to individuals for which no goods/services are exchanged. For example, unemployment benefits and subsidies.

• This type of govt spending doesn’t contribute to GDP as income is only redistributed amongst groups.

Question 10

Define capital expenditure

Answer 10

Investments in infrastructure and capital equipment.

Question 11

State the factors that affect the size and composition of public expenditure

Answer 11

Changing incomes, age distributions, expectations and the global financial crisis

Question 12

Explain how changing incomes affects the size and composition of public expenditure

Question 13

Define automatic stabilisers

Answer 13

Automatic changes in fiscal policy as the economy moves through stages of the trade cycle.

(Don’t require active govt intervention)

Question 14

Define discretionary fiscal policy

Answer 14

A demand-side policy which is the deliberate manipulation of government expenditure and taxation to influence AD.

Question 15

State examples of automatic stabilisers

Answer 15

• Increase in the number of people claiming JSA in a recession, leading to more spending on welfare.
• Increased VAT revenues during a period of growth
• Reduced requirement for mental health services during a period of growth.
• Reduced income tax revenue during holiday periods

Question 16

State examples of discretionary fiscal policies

Answer 16

• Increased level of corporation tax for businesses.
• An increase in national insurance contributions
• Furlough payments during covid
• An increase in excise duties on cigarettes and alcohol due to new research highlighting the dangers of it.

Question 17

Distinct between fiscal/budget deficit and national debt

Answer 17

Fiscal deficit = When govt expenditure > tax revenue.

National debt = The cumulative total of past government borrowing.

Question 18

Define structural fiscal/budget deficit

Answer 18

A deficit regardless of where in the trade cycle the economy is currently in (even when the economy is operating at its full potential).

Question 19

Define cyclical fiscal/budget deficit

Answer 19

A deficit that occurs due to downturns in the trade cycle as tax revenues fall and govt exp (on welfare payments) rise.

(Self-corrects when the economy
returns to its trend growth rate)

Question 20

State the factors that influence the size of the fiscal deficit

Answer 20

• The state of the economy
• The housing market (which influences revenues from stamp duties)
• Political priorities
• Unplanned events.

Question 21

Explain how the state of the economy influences the size of the fiscal deficit