4.5 - The Role of the State in the Macroeconomy Flashcards

Question

Evaluate the effects of changes in public expenditure on living standards & equality? Use case study example.

Answer 1

Public expenditure can be spent on services that don't directly help the poor e.g. military is 20% of USA's public expenditure

Answer 2

- When all resources in the economy are being used efficiently - show as efficient resource allocation on PPF by movement along PPF -> fewer resources for private sector - A rise in public expenditure on social housing -> opportunity cost to private sector - less land available for building

Answer 3

- Direct: taxes paid directly to the government e.g. income, corporation tax - Indirect: paid by the producer when the consumer purchases the product e.g. VAT

Answer 4

- Specific: a fixed amount on each unit sold - Ad-valorem: percentage of the price of the good

Answer 5

1. Progressive tax 2. Regressive tax 3. Proportional tax

Answer 6

- The proportion of income, profit, or price you pay in tax increases as your income, profit or price increases Example: UK - Income > £12, 570 = 20% of every £ above this - Income > £50, 270 = 40% of every £ above this - Income > £150,000 = 45% of every £ above this

Answer 7

- The proportion of income, profit, or price you pay in tax decreases as your income, profit or price increases - Example: National Insurance - 12% -> 2% once you start earning above £50,000

Answer 8

- The proportion of income, profit, or price you pay in tax stays the same as your income, profit or price rises Examples: - UK corporation tax - 25% - Cigarettes - 16.5% (ad-valorem)

Answer 9

- Rise in direct taxes -> decreased incentive to work -> able to keep less of your income -> may work fewer hours -> laziness + early retirement - Rise in indirect taxes -> increased incentive to work -> products will become more expensive -> people want to work more hours to earn more so they can buy the same amount of products Examples: - Top income tax rate - 20% -> 24% (2024) & basic rate rose to 18% - VAT - 17.5% -> 20% (budget)

Answer 10

- Shows the relationship between the tax rate and tax revenue - As income tax rises -> incentive to work falls -> income tax revenue falls

Answer 11

- As the tax rate increases, tax revenue will increase to begin with - But, as income tax rates get higher, incentive to work will fall because people will get to keep less of their money -> they work less -> earn less income -> government receives less income tax revenue

Answer 12

1. Decreased incentive to work - people work fewer hours & earn less income -> pay less income tax. 2. Increase in tax evasion & avoidance - people are more likely to try & find ways to avoid paying income tax if the rate increases 3. Brain drain - highly skilled & productive high earners may choose to move to a different country where they are able to keep more of their income -> government receives none of their income tax

Answer 13

- Increased direct tax (e.g. income tax) often means the rich will up paying more tax -> closes the gap between the rich & poor - more equality - Indirect taxes, e.g. VAT, are often regressive - the poor spend a much higher % of their income (higher MPC) -> pay a higher percentage of their income in VAT -> widens the gap between rich & poor - more inequality

Answer 14

- Increased direct tax -> workers keep less of their income & businesses keep less of their profit -> reduce consumption & investment -> AD falls -> price level falls - Indirect taxes, e.g. VAT, are often regressive - rise in VAT -> G&S more expensive -> consumption falls -> AD falls -> price level falls

Answer 15

- Increase in direct taxes → Workers keep less of their income + companies keep less of their profits → consumption & investment fall → AD falls → derived demand for labour falls → employment falls → output falls → Real GDP falls - Rise in VAT → G&S more expensive → decrease consumption → decrease AD (same chains)

Answer 16

- An increase in some indirect taxes, e.g. tariffs, can reduce the demand for imports (more expensive) -> improves the trade balance - However, an increase in other indirect taxes, like VAT, has no impact on import demand - just make all goods more expensive

Answer 17

- Increase in direct taxes → managers & CEOs keep less of their incomes → FDI decreases - Increase in indirect taxes → G&S more expensive → Consumers buy less → Companies make less profit → Less FDI

Answer 18

1. Inaccurate information 2. Risk & Uncertainty

Answer 19

-In 2014, inaccurate information about school enrolment -> massive misallocation of resources in Kenya - Thank you payments were given to schools with increased enrollment rates (corrupt officials lied) -> areas in need went underfunded

Answer 20

- In 1947, the UK invested £36.5 million on an investment in machinery in Tanzania - wanted to develop Tanzania's export sector - However, there was a huge risk -> policy went wrong, which led to tens of thousands of acres of land being destroyed - machines ended up being unsuitable for humidity

Answer 21

Allows parent companies to move profits between their daughter companies, in order to minimise the corporation tax they have to pay

Answer 22

A smaller company which is owned or controlled by the larger company

Answer 23

- A method of regulating transfer pricing - It states that, in any transaction between daughter companies, the price should be set the same as it would be if the company was selling its good to an unrelated, third party.

Answer 24

- A type of direct control - it directly controls the minimum prices that daughter companies can charge for their goods

Answer 25

- TNCs are footloose: they can relatively easily locate in different countries - Governments are more scared to regulate transfer pricing as the TNC can just move to a different country where it is able to use transfer pricing -> the country which has regulated will lose investment, jobs & tax revenue