4.5.2 taxtation

Question 1

define tax?

Answer 1

tax is used to pay for the number of goods and services that the government provides.

Question 2

what is the role of tax in a macroeconomic point of view?

Answer 2

to re-distribute income

Question 3

why does the government aim to keep the burden of tax low?

Answer 3

to improve the incentive-ensure taxes are equitable- tax on spending rather than income

Question 4

define progressive tax?

Answer 4

progressive tax defined as where those on higher incomes pay a higher marginal rate of tax.
e.g income tax

Question 5

define regressive tax?

Answer 5

This is defined as where the proportion of income paid in tax falls as the income of taxpayer rises.

those on higher incomes pay a smaller percentage of their income on tax
e.g everyone pays the same level of VAT

Question 6

Define proportional tax?

Answer 6

the proportion of income paid om tax remains the same whilst the income of the taxpayer changes.
e.g everyone has to pay 10% of income on tax regardless of income

Question 7

what is the impact of tax?

Answer 7

High marginal rates of tax will discourage individuals from working
-high taxes can encourage people to move abroad + taxes on the poor may lead to a poverty trap.

Question 8

what could be used as an evaluation point for impact of tax?

Answer 8

it can be argued that people have to work longer hours in order to mantain their income so taxes can actually be an incentive for workers since they are having to pay taxes.

Question 9

how do you draw the laffer diagram?

Answer 9

label the x-axis as tax rate %
label the y-axis as tax revenue
-draw a C curve pointing downwards
the point on top of the curve represents the efficient tax rate maximisation

Question 10

what did Arthur laffer ague about the increasing rates of taxes?

Answer 10

He argued that tax revenue can increase which then can be helped to redistribute income and wealth and fund central public goods

Question 11

although Laffer mentioned that taxes help to redistribute income but what did he think was a danger to tax revenues?

Answer 11

he explained that although taxes are beneficial it can only be efficient to a certain point because if taxes are increased too high there will be a reduction in tax revenue.

Question 12

what’s another impact of tax on workers and entrepreneurs?

Answer 12

workers/ entrepreneurs may disincetivised to work hard which then they can substitute work for leisure/entertainment because they will think what is the point of working hard when majority of their income will taken away by the gov.

Question 13

what’s another impact of taxes?

Answer 13

There could be an increase in emigration where high skilled workers/entrepreneurs will move abroad where tax rates are lower in other economies. This will be a huge problem since they are the biggest tax providers to the gov (very damaging).

Question 14

what’s another impact of tax evasion/avoidance?

Answer 14

some may wish to not declare all their income

some may find loopholes in the system

Question 15

what is the problem with indirect taxes?

Answer 15

they can be uncertain as it depends on consumer spending patterns

Question 16

what is the benefit of progressive taxes?

Answer 16

they can increase the equality of income as more of the rich are taxed than the poor.

Question 17

what is the problem with regressive tax?

Answer 17

it will decrease income equality

Question 18

why is inheritance raxes so important?

Answer 18

they are the most progressive form of taxation. High corporation tax is taken from shareholders who are profit maximizers and give them to gov to spend on the poor.
in order to make it more beneficial the gov needs to include benefits to further help the poor.

Question 19

when there is a rise in direct taxes what impact does this have on workers?

Answer 19

this will reduce the level of disposable income which means their spending levels will decrease causing a decrease in AD.

Question 20

when there is a rise in direct taxes what impact will this have on producers?

Answer 20

there will be a fall in leftovers profits for businesses since there will be a decrease in investment this will depend on whether the economy is at full employment or not.

Question 21

when there is a rise in tax how will this impact trade balance in the UK economy?

Answer 21

When there is a rise in rax it will cause workers’ disposable income to decrease causing a decrease in consumption meaning they will spend less on imports.

• import are highly elastic in the UK
• This means trade balance will improve in the short because UK is known for a budget deficit

Question 22

what is the problem with taxes in the long run in terms of trade balance?

Answer 22

However, in the long-run AD will reduce the businesses’ need to invest and reduce competitiveness meaning exports will decrease.

Question 23

when there is low taxes why can this increase the incentive for businesses to invest?

Answer 23

they are able to retain more profits which will result in them seeing a higher level of return as a result they are more incentivized to invest because they will see profits which is the main objective of firms.

Question 24

what is the problem with low taxes and investment for businesses?

Answer 24

when there are lower taxes businesses will have the drive to invest but for them to invest taxes have to be the lowest and encourage investment which will lead to a fall in revenue.