4.5.2 taxation

Question 1

What is meant by progressive taxes?

Give examples.

Answer 1

• a type of tax that imposes higher rates on higher income earners as opposed to those on a lower income.
• income tax
• rental earnings

Question 2

What is meant by proportional taxes?

Give examples.

Answer 2

• Different income levels pay the same % of income in tax.

- sales tax

Question 3

What is meant by regressive taxes?

Give examples.

Answer 3

• Where a lower rate of tax is paid as incomes increase
• Gambling taxes
• Excise duty

Question 4

What are direct taxes?

Give examples.

Answer 4

• Type of tax which is paid for by an individual directly to the government
  - Income tax
  - inheritance tax
  - corporation tax

Question 5

What are indirect taxes?

Give examples.

Answer 5

• Charge on producers of goods and services and is paid by the consumer indirectly
  - Excise tax
  - VAT
  - service tax.

Question 6

What will be the impact of changes in direct or indirect taxes on the incentive to work?

Answer 6

• Higher income tax will lead to a less incentive to work and may affect output numbers

Question 7

What will be the impact of changes in direct or indirect taxes on tax revenues?

Answer 7

• Higher tax indirect or direct will initially lead to an increase in tax revenue
• However an increase in both could lead to less consumption and less output which worsens the economy

Question 8

What is the Laffer curve?

Answer 8

• if tax rates are increased above a certain level, then tax revenues can actually fall
  -because higher tax rates discourage
  people from working.

Question 9

How does the Laffer curve explain the changes in tax revenues?

Answer 9

• Theoretically an increase in tax should increase tax revenue
  - however due to less incentive to work it
  will lead to less output which leads to less
  consumption and less indirect and direct
  tax

Question 10

What will be the impact of changes in direct or indirect taxes on the distribution of income

Answer 10

• Those with lower income will be worse off as they will have a more burden of loss of income than those affluent

Question 11

What will be the impact of changes in direct or indirect taxes on real output and employment?

Answer 11

Higher indirect or direct tax will lead to
- Less output
- Less supply
- Less revenue for firms
- Could lead to loss of jobs as firms get less revenue and less
money to pay employees

Question 12

What will be the impact of changes in direct or indirect taxes on FDI?

Answer 12

• Changes in taxation, particularly corporation tax, will have a significant impact on FDI.
  - Low business taxes encourage firms from abroad to invest
  heavily in the UK

                   - creates a competitive environment, attracting transnational 
                       businesses.
  
                    - FDI will encourage investment over 
                       the long term and significant in 
                       creating employment
  
                     - FDI leads to increases in the 
                      productive capacity of an economy 
                       leading to economic growth