4.5 - The role of the state in the macroeconomy Flashcards
Define direct tax ang give examples of who pays it and its purpose
= 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
Define progressive tax (direct)
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.
Define regressive tax (indirect)
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).
Define proportional tax
Where the proportion of income paid on tax remains constant whilst the income of the taxpayer changes. For example, sales and real estate tax.
Explain the effect on incentives to work from changes in tax rates
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.
Explain the effect on tax revenues from changes in tax rates
Define public expenditure
Govt spending which represents a significant proportion of AD in many economies.
Define current expenditure
The daily payments required to run the govt and public sector. For example, the wages/salaries of employees and the payments for goods/services.
Define transfer payments
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.
Define capital expenditure
Investments in infrastructure and capital equipment.
State the factors that affect the size and composition of public expenditure
Changing incomes, age distributions, expectations and the global financial crisis
Explain how changing incomes affects the size and composition of public expenditure
Define automatic stabilisers
Automatic changes in fiscal policy as the economy moves through stages of the trade cycle.
(Don’t require active govt intervention)
Define discretionary fiscal policy
A demand-side policy which is the deliberate manipulation of government expenditure and taxation to influence AD.
State examples of automatic stabilisers
- 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
