4.5.2 - Taxation

Question 1

Define progressive taxation

Answer 1

As income rises, a larger percentage of income is paid in tax

Question 2

Define proportional taxation

Answer 2

The percentage of income paid as tax is constant, no matter what the level of income is

Question 3

Define regressive taxation

Answer 3

As income rises. a smaller percentage of income is paid as tax

Question 4

What can increasing tax rates lead to ?

Answer 4

• More tax evasion and tax avoidance
• More tax exiles

Question 5

What is a tax exile ?

Answer 5

A person who leaves a country to avoid tax

Question 6

Describe the laffer curve

Answer 6

As tax rate increases, the total tax revenue increases until it reaches a certain point

Once it reaches this point, as the tax rate increases the total tax revenue decreases

Question 7

What shape is the laffer curve

Answer 7

It is an upside down parabola

Question 8

What does direct taxation affect ?

Answer 8

• Reduced output, employment and inflation

Question 9

Which direct taxes reduce disposable income ?

Answer 9

Income tax

National insurance

Question 10

What does a lower disposable income lead to ?

Answer 10

It leads to lower consumption which means lower aggregate demand. This leads to lower output which reduces firms needs for goods and services. As a result, employment would fall and inflation along with it

Question 11

What does a raise in income tax cause regarding incentives to work ?

Answer 11

It reduces incentives to work which acts to reduce both the number of hours worked and the willingness of people to be employed

Question 12

What does people working shorter hours lead to ?

Answer 12

It leads to a decrease in LRAS because labour is a factor of production.

This ultimately reduces economic growth

Question 13

What does indirect taxation affect ?

Answer 13

Tax revenue

Incentives to work

Real output, the price level and employment

The trade balance

FDI flows

Question 14

How does an increase in indirect taxation lead to increases in the incentive to work ?

Answer 14

An indirect tax raises the price of goods and services. Therefore, consumers will likely need to reduce consumption given they have a fixed disposable income.

Some consumers may seek to maintain their standard of living by earning more money.

Question 15

What happens as tax rates increase ?

Answer 15

Goods and services become less affordable thereby reducing demand for them

Question 16

What is demand likely to be at low tax rates ?

Answer 16

Demand is likely to fall by a lower proportion than the rise in price

Question 17

What is demand like at low tax rates ?

Answer 17

Demand is likely to fall by a lower proportion than the rise in price

Question 18

How affordable are goods when tax rates rise ?

Answer 18

Goods will become less and less affordable as tax rates rise

Question 19

What do consumers turn to when tax rates are high ?

Answer 19

They turn towards the black market so they can seek cheaper alternatives

Question 20

How do increases in indirect tax rates affect real income ?

Answer 20

They cause a fall in real income

Causes a fall in consumption

Reduces aggregate demand

Consequently, real output and employment would fall.

The price level would also fall.

Question 21

What are tariffs ?

Answer 21

They are another form of indirect tax on imports

Question 22

What do tariffs do to the price of imports ?

Answer 22

They increase the price of imports

Question 23

What affect do tariffs have on imports ?

Answer 23

They make imports less competitive which should lead to a fall in demand for imports.

As a consequence, the trade balance would improve.

Question 24

How can countries respond to trade barriers put on them ?

Answer 24

They respond by placing retaliatory trade barriers

Question 25

How can an increase in indirect taxes affect FDI flows ?

Answer 25

TNCs may be deterred from setting up operations in the country since higher indirect taxes would increase production costs and disposable incomes.