4.5.2 Flashcards
define progressive tax
higher tax rates as income increases
define regressive tax
impose a higher tax burden on lower-income individuals compared to higher-income individuals
eg: VAT everyone pays the same percentage of tax regardless of income.
define proprtional tax
flat taxes
a constant tax rate to all income levels- individuals pay the same percentage of their income in taxes, regardless of their income.
eg: flat income tax where everyone pays 20% of their income
what are the factors that are affected by chnages in taxation?
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- incentives to work
- tax revenues (the Laffer Curve)
- income distribution
- real output and unemployment
- price level
- trade balance
- FDI
how do changes in taxation affect incentives to work?
how do changes in taxation affect the tax revenue (Laffer Curve)?
up until point T, tax revenue increases. After point T people do not think it is worthwhile working and the lack of incentive leads to falling tax revenue
* increased tax avoidance
* “brain drain” effects on workers- moving elsewhere and loss of skilled workers
how do changes in taxation affect income distribution?
taxes can be used as a tool to redistribute income, improving inequality
* regressive taxes worsen
* progressive taxes improve
how do changes in taxation affect real output and employment?
- more corporation tax may discurage investment and expansion
how do changes in taxation affect price level?
- Indirect taxes could cause cost push inflation. Indirect taxes could increase the cost
of goods such as cigarettes or fuel, if producers choose to pass the costs onto the
consumer. Since the demand for cigarettes and fuel is relatively price inelastic,
producers are likely to pass the cost of the tax onto consumers.
how do changes in taxation affect trade balance?
higher import tarrifs may reduce imports but may then enourage retalitory tarrifs, reducing exports
how do changes in taxation affect FDI ?
Taxes should also be consistent and predictable, so they are business friendly. This would encourage FDI
flows. High, fickle taxes are likely to discourage FDI flows, since investors will choose to invest elsewhere
