4.5.2 Taxation

Question 1

Progressive taxes (direct)

Answer 1

As income rises, a larger percentage of income is paid in tax (proportion increase, income increases)
- e.g UK income tax- 10%, 20%, 45%

Question 2

Proportional tax (direct)

Answer 2

The percentage of income paid in tax is constant, no matter what the level of income
- e.g everyone pays same income tax - 20%

Question 3

Regressive tax (indirect)

Answer 3

As income rises, a smaller percentage of income is paid in tax (proportion decreases, income rises)
- e.g excise duties on tobacco, alcohol & petrol

Question 4

Effects of changes in direct tax

Answer 4

• tax revenue
• AD
• incentives
• income distribution
• real output & employment

Question 5

Effects of changes in direct tax (tax revenue)

Answer 5

• increase tax = increase income = increase revenue = higher spending on healthcare and education

Question 6

Effects of changes in direct tax (AD)

Answer 6

• income tax = less discretionary income to spend after income tax = lower levels of household spending

Question 7

Effects of changes in direct tax (AD) evaluation

Answer 7

However, if the govt spend the tax revenue- overall AD will not be affected

Question 8

Effects of changes in direct tax (incentive)

Answer 8

Higher income tax might act as disincentive for unemployed to accept jobs or to work overtime.
- substitution effect

Question 9

Substitution effect

Answer 9

Higher tax leads to lower wages – and work becomes relatively less attractive than leisure. The substitution effect of a higher tax is that workers will want to work less.

Question 10

Effects of changes in direct tax (incentive) evaluation

Answer 10

• Income effect
• However, if higher tax = lower wages, a worker may feel the need to work longer hours to maintain his target level of income.
• so, the income effect means that higher tax =some workers feel the need to work longer.
  This means there is no guarantee of the impact of higher tax – it depends whether the substitution effect is greater than the income effect.

Question 11

Effects of changes in direct tax (income distribution)

Answer 11

• progressive tax, like income tax, might redistribute income from those econ higher incomes to those on lower incomes if tax revenues raised are used for benefits to the poor
• Laffer curve

Question 12

Impact of high tax in an example country

Answer 12

• Some argue that the high levels of tax in Nordic countries = disincentive to growth and investment.
• On the other hand, the stability of a welfare state, health care and education reduce uncertainty and problems such as health bankruptcy.

Question 13

Impact of indirect tax

Answer 13

• tax on externalities
• incentives to work
• tax revenues - tax = inflation
• income distribution
• reduced FDI

Question 14

Impact of indirect tax evaluation

Answer 14

The impact will depend on elasticity of demand

Question 15

Laffer curve

Answer 15

Shows that tax rate cut could lead to an increase in tax revenue, or decrease in tax revenue, depending whether you have already passed the ‘optimal tax rate’

Question 16

Reasons why total tax revenue fall if the tax rate increase

Answer 16

• increased rates of tax avoidance
• greater incentive to evade taxes
• disincentive effects
• ‘brain drain’ effects

Question 17

Reasons why total tax revenue fall if the tax rate increase (tax avoidance)

Answer 17

Greater incentive tos eek out tax relief, make max use of tax allowance

Question 18

Reasons why total tax revenue fall if the tax rate increase (evade taxes)

Answer 18

Illegal, ie non-declaration of income & wealth

Question 19

Reasons why total tax revenue fall if the tax rate increase (disincentive effects)

Answer 19

Possible disincentive effects in the labour market (depending on which taxes have been increased)

Question 20

Reasons why total tax revenue fall if the tax rate increase (‘brain drain’ effects)

Answer 20

Possible ‘brain drain’ effects (ie loss of highly skilled, high income taxpayers

Question 21

Evaluating the laffer curve

Answer 21

• low tax
• depends relative to benefits
• might take more leisure time
• Keynesian explanation

Question 22

Evaluating the laffer curve (lower tax)

Answer 22

Encourage lower tax rates on high income earners however it can lead to income inequality

Question 23

Evaluating the laffer curve (depends on benefits)

Answer 23

• if benefits are larger than the tax imposed, the benefits might affect incentives more

Question 24

Evaluating the laffer curve (leisure time)

Answer 24

Tax cuts might cause highly paid ppl to take more leisure time instead of work (backward bending Labour supply curve effect)

Question 25

Evaluating the laffer curve (Keynesian)

Answer 25

cuts in tax increases real disposable income so lead to increase consumption and increased AD

Question 26

Impact of indirect tax (tax on externalities)

Answer 26

• internalise the cost

Question 27

Impact of indirect tax (incentives to work)

Answer 27

They will work harder if there are higher taxes on goods

Question 28

Impact of indirect tax (tax revenues)

Question 29

Impact of indirect tax evaluation

Answer 29

Tax = inflation

Question 30

Impact of indirect tax (income distribution)

Answer 30

Often regressive or disproportionate effect

Question 31

Impact of indirect tax (reduced FDI)

Answer 31

Less likely to invest

Question 32

Income tax

Answer 32

• A direct tax taken out of a person’s income. Income tax = increased econ growth since ppl increase work = increase saving = invest more
• this is progressive so those earning more, pay a higher proportion of their income in tax

Question 33

Income UK tax

Answer 33

£12, 571 = 20%
£50, 271 = 40%
Over £150,000= 45%

Question 34

Corporation tax

Answer 34

Increased tax on the profits of a corporation.
- business confidence
- a reduction in corporation tax rate could result in higher wages & employment, decrease tax, increase demand labour = increases wages
(Progressive)

Question 35

Corporation tax UK

Answer 35

UK: 19%
Ireland:

Question 36

National insurance

Answer 36

Used to fund govt benefits program e.g state pensions
- UK govt announced a 1.25% increased from April 2022
- increased national insurance = decreased disposable income = i decreased consumption as a % of GDP = increase in real GDP
(Regressive)

Question 37

National insurance UK

Answer 37

13.8%

Question 38

Council tax

Answer 38

• local taxation collected by authorities
• levied on residential property on an annual basis based on the value of that property
  (Regressive due to property value rather than income)

Question 39

Value added tax

Answer 39

• levied on the purchase. It is reflected in the price paid when items are bought & is collected from traders

Question 40

Excise duties

Answer 40

Indirect taxes applied to the sale/use of goods such as alcohol, tobacco & energy products

Question 41

Transfer pricing

Question 42

Give on microeconomic impact of tax on plastic packaging

Answer 42

• increase private costs to producers= encourage them to innovate to find ways of reducing plastic (unless business find ways to cut plastic cost will rise & profits will fall)
• regressive effect
• reduce externalities

Question 43

Give on macroeconomic impact of tax on plastic packaging

Answer 43

• increase inflation (cost push inflation) . Producers will pass on higher costs to consumers (shown through diagram showing inward shift of SRAC.
• however depends on significance of plastic in supply costs. In many industries, labour and energy costs are more important so effect on inflation is limited.
• in addition, firms will have incentive to re formulate their packaging = long run = lower unit cost

Question 44

Conclusion of plastic tax

Answer 44

• long run benefits to environment