4.5.2 Taxation ✅

Question 1

What is tax?

Answer 1

Money collected by gov to pay for g/s they provide + correct market failure (micro level) + manage economy/distribution of income.

Question 2

What was the uks fiscal deficit this year?

Answer 2

132bn pounds

Question 3

What are the three types of tax?

Answer 3

• Progressive.
• Regressive.
• Proportional.

Question 4

What is a progressive tax? Example? Draw graph?

Answer 4

Higher income pay higher marginal rate/higher percentage. Eg. income tax

Question 5

What is regressive tax? Example? Draw graph?

Answer 5

Those on higher incomes pay smaller percentage of income on tax (proportion to income falls).
Eg. VAT (indirect). + poll tax (200 pp).

Question 6

What is proportional tax? Draw graph?

Answer 6

Proportion of income spent on tax remains the same whilst income changes. (Everyone pays same percentage).

Question 7

What did Adam smith say made a good tax?

Answer 7

• low costs of collection.
• clear time of payment.
• tax dependent on ability of taxpayer to pay.
• lowest cost to econ efficiency maybe improve it.

Question 8

What does tax changes impact?

Answer 8

• Incentives to work.
• Tax rev.
• Income distribution.
• Real output + employment.
• price level.
• trade balance.
• FDI flows.

Question 9

How does tax change impact incentives to work?

Answer 9

Argued = higher MR of tax will dis-incentivise workers.
- free market economists argue labour is wage elastic (less tax = more workers + longer).
- substitution effect.
- high earners may move abroad.
- poor taxed may lead to poverty trap.

Question 10

Explain substitution effect? How is it countered?

Answer 10

Occurs when higher tax makes work less attractive than leisure. Opp cost of leisure decrease thus worker incentivised to work less.

Income effect = as tax increase workers will work more in order to make money they lost.

Question 11

What tax changes work incentives what doesn’t? What does this show?

Answer 11

Income does. VAT doesn’t.
Switch maybe the better alternative.

Question 12

What argues against increased taxes effecting incentives?

Answer 12

No hard evidence = Nordic countries have high tax but similar rates of growth to lower tax countries.

Question 13

How can higher tax effect govs revenue? (Explain laffer) draw graph?

Answer 13

Rise in tax does not necessarily increase rev.
Tax revenue will initial rise as tax increases but will fall once optimal tax (rev max) has been reached.
Due to decrease in motivation/work after peak + incentivised to avoid.

Question 14

What do indirect taxes depend on?

Answer 14

Consumer spending habits.

Question 15

What are the effects of changing tax on income distribution? Spec focus on progressive?

Answer 15

Progressive = more distribution.
Regressive = less.

Progressive = inheritance tax + corporation tax. (Help more w redistribution).

Only help if tax is used on benefits + can be outweighed by negatives of indirect (regressive).

Question 16

What are the effects of tax to real output/employment?

Answer 16

• Increase in direct will cause a leakage + lower di therefore reduction in AD. (Effect on output depends were economy is).
• indirect increase will increase costs thus reduce SRAS.
• Disincentivise workers thus reduces LRAS.

Question 17

How does tax effect the price level?

Answer 17

• Indirect tax = cost push inflation. (Cuz workers ask for higher wages).
• Increase in AD = Inflation.

Question 18

How does tax effect the trade flow balence?

Answer 18

• Imports may decrease due to in uk have high income elasticity to imports. (Decrease consumption due to lower income).
• Exports may decrease also due to domestic firms becoming less competitive with higher prices and less investment.

Question 19

How does tax effect FDI?

Answer 19

• Lower tax on profit encourages FDI. (Corporation tax)
• Negative effect of this causing “race to bottom” which lowering the tax causes revenue loss.