4.5.2 - Taxation

Question 1

What Are The Different Ways A Government Can Implement Tax?
(3 Points)

Answer 1

~ Progressive tax.

~ Regressive tax.

~ Proportional tax.

Question 2

What Is Meant By ‘Progressive Tax’?
(2 Points)

Answer 2

~ Proportion of income, profit or price you pay in tax, increases as your income, profit or price increases.

~ Decreases income inequality.

Question 3

What Is Meant By ‘Regressive Tax’?
(3 Points)

Answer 3

~ Proportion of income, profit or price you pay in tax decreases as your income, profit or price increases.

~ Increases income inequality.

~ E.g. National insurance tax in the UK.

Question 4

What Is Meant By ‘Proportional Tax’?
(3 Points)

Answer 4

~ Proportion of income, profit or price you pay in tax stays the same as income, profit or price increases.

~ Doesn’t affect income inequality.

~ E.g. Corporation tax.

Question 5

What Are The Economic Effects Of Changes In Tax Rates?
(7 Points)

Answer 5

~ Incentives to work.

~ Tax revenues (Laffer curve).

~ Income distribution.

~ Output and employment.

~ Price level.

~ Trade balance.

~ FDI flows.

Question 6

Describe ‘Incentives To Work’ As An Economic Effect Of Changing Tax Rates
(2 Points)

Answer 6

~ Higher direct tax rates, means less disposable income, providing no incentive to work, decreasing productivity. Vice versa.

~ Lower indirect taxes, means cheaper products, providing less of an incentive to work hard, decreasing productivity. Vice versa.

Question 7

Describe ‘Tax Revenues (Laffer Curve)’ As An Economic Effect Of Changing Tax Rates

Answer 7

If tax rates increase too much, it decreases incentives to work, decreasing tax revenue.

Question 8

Describe ‘Income Distribution’ As An Economic Effect Of Changing Tax Rates
(2 Points)

Answer 8

~ Decreasing direct tax rates, increases income inequality. Vice versa.

~ Progressive tax rates, increases the equality of income distribution.

Question 9

Describe ‘Price Level’ As An Economic Effect Of Changing Tax Rates
(2 Points)

Answer 9

~ Decreasing direct taxes, increasing disposable income, causing an increase in the price level. Vice versa.

~ Increasing indirect taxes, means more expensive goods, decreasing consumption, decreasing the price level. Vice versa.

Question 10

Describe ‘Output & Employment’ As An Economic Effect Of Changing Tax Rates
(2 Points)

Answer 10

~ Decreasing direct tax, means more spending, increases AD, meaning more output, increasing employment. Vice versa.

~ Increasing indirect taxes, means more expensive goods, decreasing consumption, reducing output, and decreasing employment.

Question 11

Describe ‘Trade Balance’ As An Economic Effect Of Changing Tax Rates
(2 Points)

Answer 11

~ Decreasing direct tax, means more disposable income, increasing import spending, worsening the trade balance. Vice versa.

~ Indirect taxes such as tariffs, when decreased, increases imports, worsen the trade balance. Vice versa.

Question 12

Describe ‘FDI Flows’ As An Economic Effect Of Changing Tax Rates
(2 Points)

Answer 12

~ Decreasing direct tax, means more incomes, increasing investment from foreign firms. Vice versa.

~ Increasing indirect taxes, means less spending, decreasing investment from foreign firms. Vice versa.