4.5.2 Taxation

Question 1

Proportional tax?

Answer 1

• % of income paid in tax is constant no matter what level of income

Question 1

Progressive tax?

Answer 1

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

e.g. UK income tax

Question 2

Regressive tax?

Answer 2

• As income rises, smaller % of income paid in tax

e.g. VAT

Question 3

How can changes in income taxes affect incentives to work?

Answer 3

• ↑tax = demotivates = ↓incentive to work

Question 4

Laffer curve?

Answer 4

• Shows optimum level of tax for max revenue
• If beyond optimum level, can get tax avoidance + evasion

Revenue (Y) / Tax rate (X)

Question 5

How can direct taxes affect income distribution?

Answer 5

• Tax higher income more = redistribution through welfare benefits

Question 6

How can direct taxes affect real output and employment?

Answer 6

• Affects income = affects consumption = shifts AD = affects demand for goods and services = affects employment

EV:
* Increasing direct taxes important when theres budget deficit
* Better to ↑taxes than borrow
* Could be used for SSP = ↑education + training

Question 7

How could an increase in income tax lead to an improvement in a country’s trade balance?

Answer 7

• ↑ income tax = ↓ disposable income = ↓ imports = ↓ trade deficit
• ↑ gov revenue for SSPS = ↑ export competitiveness = ↑ exports = improved trade balance

EV:
* If price inelastic, decrease of imports will be smaller
* Depends on relative sizes of exports/imports
* Depends on what tax revenue is used for
* Evaluations of SSPs (time lag, risky)

Question 8

How would an increase in corporation taxes affect FDI?

Answer 8

• ↑ corporation taxes = ↑ production costs = less attractive for FDI = capital flight

EV:
Netherlands more attractive than Ireland despite Ireland’s 12.5% corporation tax
* Natural resources
* Healthier population (better quality healthcare)
* ↑ Quality education