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Economics - Chapter 8 > Chapter 13 > Flashcards

Chapter 13 Flashcards

1
Q

What are the 2 types of gov taxes?

A

Direct taxes = taxes on different forms of income
Indirect taxes = taxes on expenditure

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2
Q

Taxation finances what?

A

Gov expenditure

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3
Q

Define fiscal policy

A

Changes in gov spending or taxation to achieve economic change

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4
Q

Define direct tax

A

Taxes which cannot be avoided and are normally levied on incomes

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5
Q

Define indirect tax

A

Taxes which can be passed on to others and are normally expenditure

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6
Q

Explain progressive taxes

A

Are paid in bands of income
In the UK, 0%, 20%, 40% and 45% tax rates are used as incomes rise

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7
Q

Explain regressive taxes

A

Taxes on expenditure and fixed-sum taxes are often regressive if the expenditure is paid by all the income earners in similar amounts.
VAT may be regressive if necessities are taxed

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8
Q

Explain proportional taxes

A

VAT may be proportional if only luxuries are taxed

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9
Q

What are the UK’s 9 main taxes?

A

Income tax - paid on income from employment
National insurance contributions
Corporation tax
Capital gains tax
Inheritance tax
Value added tax (VAT)
Excise duties
Council tax
Stamp duty

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10
Q

What are the benefits/cons of taxes on incomes (i.e. income tax, corporation tax)?

A

Pros/
Progressive tax may be equitable and alleviate relative poverty

Cons/
Income taxes create incentives to work
High income taxes encourage tax evasion/avoidance
High business taxes may cause a ‘brain drain’ (or a failure to attract FDI)

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11
Q

What are the pros/cons of taxes on expenditure (i.e. VAT)?

A

Pros/
Change patters of expenditure (i.e. taxing demerit goods)
Do not create incentives to work/invest

Cons/
Possibly regressive
Lead to underground/black markets

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12
Q

What are the 5 reasons for government levying taxes?

A

Raise rev to finance expenditure
Change patterns of economic activity (i.e. taxes on demerit goods)
Redistribute income (possibly via progressive taxes)
Manage the macroeconomy (to change AD)
Raise money for particular causes - hypothecated taxes

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13
Q

Define progressive tax

A

A tax that increases as a proportion of income as income rises

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14
Q

Define regressive tax

A

A tax that increases as a proportion of income as income falls

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15
Q

Define proportional tax

A

A tax that is paid as an equal proportion of income at all levels of income

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16
Q

What are the principles of taxation?

A

A good tax should be:
Economical
Equitable
Efficient
Convenient
Certain
Flexible

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17
Q

Explain public (gov) expenditure

A

Current expenditure - spending on day-to-day costs in providing public services (i.e. NHS salaries)
Capital expenditure - spending on long term projects (i.e. infrastructure)

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18
Q

What are the 6 reasons for gov expenditure?

A

Provision of welfare
Provision of public goods
Provision of merit goods
Servicing the national debt
Macroeconomic management (affecting AD)
Supply-side improvements/investment

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19
Q

What do changes in tax and gov spending affect?

What 3 things does changes in the fiscal policy affect?

A

AD

Level of real GDP
Unemployment rate
Inflation rate

It will also affect AD via effects on consumption, investment and gov expenditure.

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20
Q

Explain the expansionary fiscal policy

A

Is a fiscal policy that increases AD.
Higher gov expenditure
Lower rates of taxation

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21
Q

Explain the contractionary fiscal policy

A

Is a fiscal policy that decreases AD.
Lower gov expenditure
Higher rates of taxation

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22
Q

Explain the fiscal policy in regards to aggregate supply

A

Changes in fiscal policy also affect AD
Changes in indirect taxes affect SRAS (i.e. higher VAT shifts SRAS leftwards)
Changes in gov expenditure can affect LRAS (i.e. improvements to education)
Changes in tax rates can encourage higher business investment in research, leading to supply-side improvements (LRAS)

Fiscal policy can have microeconomic effects:
- subsidies used to encourage consumption of certain goods
- indirect taxes change patterns of behaviour

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23
Q

Explain the budget balance

A

Measures the difference between gov spending and rev from taxation.

Measures a gov’s fiscal stance (how easy/loose or tight/restrictive currency policy is)
Budget deficits are financed by the issue of bonds, adding to national debt
Budget surpluses allow the partial repayment of national debt

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24
Q

What is a budget deficit?

A

Gov spending > taxation

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25
Q

What is a budget surplus?

A

Taxation > gov spending

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26
Q

Define the budget balance

A

Measures the difference between gov spending and rev from taxation

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27
Q

How can a budget deficit be caused?

A

Expansionary fiscal policy
Low economic growth leading to low taxation revenue

28
Q

Budget deficits can be split into 2 components

A

Cyclical budget deficits
Structural budget deficits

29
Q

What are the features of cyclical deficits?

A

Budget deficits resulting in lower than average economic growth
When economic growth is lower than average, taxation rev falls and gov welfare spending increases
Cyclical deficits are eliminated by faster economic growth

30
Q

What are the features of structural deficits?

A

Budget deficits remaining when economic growth is average or above
Faster economic growth reduces a budget deficit but the structural component remains
Structural deficits are eliminated by reductions in gov spending or increases in tax rates

31
Q

What are the 3 outcomes of budget deficits and budget surplus?

A

Economic growth - budget deficits add to AD and increase economic growth, whereas surpluses reduce AD and reduce economic growth. Economic growth also affects the budget balance:
- faster growth generates higher tax rev and reduces a deficit
- lower growth generates lower tax rev and adds to a deficit

Unemployment - expansionary fiscal policy increases a budget deficit and reduces unemployment. Contractionary fiscal policy decreases a budget deficit and increases unemployment.

Inflation - expansionary fiscal policy adds to AD and increases demand-pull inflation. Contractionary fiscal policy reduces AD and decreases demand-pull inflation

32
Q

What is the significance of the national debt?

A

National debt represents accumulated past budget deficits.
Larger national debt = higher interest payments to service this debt (paid on each bond issued)
If national debt becomes too large = investors buying bonds will demand higher interest rates on each bond issued - increasing gov spending

33
Q

What does national debt (as a percentage of GDP) do if it grows at a slower rate than the rate of growth in GDP (economic growth)

A

It falls

34
Q

Define the term cyclical budget deficit

A

A budget deficit caused by the effects of lower economic growth

35
Q

Define the term structural budget deficit

A

A budget deficit which remains even when economic growth is average or higher

36
Q

Define the term national debt

A

The accumulated stock of outstanding bonds issued, due for eventual repayment

37
Q

Explain the OBR

A

Office for Budget Responsibility = provides independent analysis of fiscal policy.
Makes it harder for gov to use fiscal policy for political motives.

38
Q

What are the 5 main functions of the OBR?

A

Economic forecasting
Evaluating fiscal policy
Analysis of public finances sustainability
Evaluation of fiscal risks
Analysis of tax and welfare costing

39
Q

What is long run economic growth a result of?

A

Improvements/increases in the supply side of the economy

40
Q

What do supply-side policies (improvements) allow?

A

Increases GDP without inflationary pressures emerging.

41
Q

What are the economic effects of supply side policies on GDP?

A

Increasing the supply side of the economy should lead to higher GDP
Long-run growth is increased with supply side reform.
Actual growth can be increased through policies designed to increase (LR)AS and AD

42
Q

What are the economic effects of supply side policies on unemployment?

A

Lower income taxes discourage people being voluntarily unemployed
Reduced welfare benefits discourage voluntary and/or frictional unemployment
Deregulation of markets (and privatisation) encourages competition, allowing businesses to expand - needing more workers
Improvements in education should reduce occupational immobility and reduce structural unemployment
Investment in infrastructure (especially transport) should reduce geographical immobility and reduce structural unemployment

43
Q

What are the economic effects of supply side policies on inflation?

A

Increase in LRAS means AD can be increased without demand-pull inflation emerging
Trade union reform should reduce cost-push pressure (as wage increases are moderated)
More competition in markets lead to less upward pressure on prices

44
Q

What are the economic effects of supply side policies on the current account of the balance of payments?

A

Downward pressure on inflation should increase export competitiveness.
More productive workforce should mean exports are produced more cheaply
Quality of output should improve, increasing demand for UK exports

45
Q

Define supply-side policies

A

Gov policies to increase the productive capacity of the economy

46
Q

Define supply-side improvements

A

Natural increases in the productive capacity of the economy (i.e. higher birth rate etc)

47
Q

What are the 6 free market supply side policies?

A

Income tax cuts and personal incentives
Reduction in trade union power
Reduction or elimination of the min wage
Reduction in unemployment benefits
Reduction in labour protection
Privatisation and deregulation

48
Q

Explain the free market supply side policy of income tax cuts and personal incentives

A

Cuts in income tax are a supply-side policy
Lower income tax rates mean workers keep more of each £ earned = encourages more people to supply their labour and will increase the tax rev earned as more people work.
Can be seen on the Laffer curve diagram

49
Q

Explain the free market supply side policy of reduction in trade union power

A

Trade unions use collective strength to push wages above the free market equilibrium level.
Reducing trade union power makes it easier for firms to hire/fire workers

50
Q

Explain the free market supply side policy of reduction or elimination of the min wage

A

Min wages create real-wage unemployment
Reducing or abolishing min wages should move the wage rate back to its free market equilibrium level.
A min wage will add to or create real-wage unemployment - therefore reducing or abolishing the min wage will reduce this type of unemployment

51
Q

Explain the free market supply side policy of reduction in unemployment benefits

A

Benefits make being unemployed more attractive and workers will take longer to move between jobs.
Reducing the level of benefits or making it harder to qualify for benefits reduces voluntary and frictional unemployment

52
Q

Explain the free market supply side policy of reduction in labour protection

A

Minimising or cancelling labour protection legislation reduces unemployment.
Firms are more willing to employ workers if the cost of employing workers is lower.
Employment is more likely if its easier for firms to shed surplus labour.
0 hours contracts are a good example of how firms can choose when to hire workers, but not pay for them when they’re not needed.
Reductions in restrictions on working hours and making paternity and maternity. leave less costly for businesses would also encourage them to recruit more workers.

53
Q

Explain the free market supply side policy of privatisation and deregulation

A

Transferring businesses from the public to the private sector should make businesses more efficient due to private businesses being more likely to pursue profits.
Privately owned businesses are more likely to cut costs and expand (and employ) than a public business
Privatisation may be accompanied by deregulation to ensure actual competition
Allowing private sector firms to compete with previously state-owned businesses should lead to lower prices and higher output (and higher quality as well)
Private businesses are more likely to invest in new tech

54
Q

What are the 6 interventionist supply-side policies?

A

Education
Training
Industrial policy
Research and development subsidies
Infrastructure investment
Entrepreneurship

55
Q

Explain the interventionist supply-side policy of education

A

Expansion of education and reform of education should increase LRAS in 2 ways:
1. Higher productivity of workers= due to future workers becoming more skilled in school or at college
2. Less structural unemployment as education can give the future workforce more transferable skills, allowing them to move between different jobs more easily

56
Q

Explain the interventionist supply-side policy of training

A

Increased training should boost productivity and improve the skills base of the workforce.
This can be provided directly by the gov or by the private sector through subsidies/tax breaks

57
Q

Explain the interventionist supply-side policy of industrial policy

A

Gov can encourage investment through grants, tax breaks and subsidies
Other aspects of supply-side reform (labour market reform, educational reform) can also help industrial policy

58
Q

Explain the interventionist supply-side policy of R and D subsidies

A

Increased spending on R&D encourages technological advances and new innovations (all of which increases LRAS)
Can be achieved through legislative changes as well as gov spending and tax reform

59
Q

Explain the interventionist supply-side policy of infrastructure investment

A

Govs spend money on infrastructure to improve economy’s supply side.
Improvements to transport links (i.e. development of HS2) and improvements to digital communication make the economy function more efficiently (and may also reduce geographical immobility)

60
Q

Explain the interventionist supply-side policy of Entrepreneurship

A

Govs can encourage more people to create business start ups through:
1. Provision of grants and other assistance for new start ups
2. Improving enterprise education in schools and colleges
3. Removing barriers to setting up a business (this would be a free market supply-side policy)

61
Q

Some supply side policies can also be fiscal policy. Give 3 examples.

A

Tax changes
Investment in education or infrastructure
Provision of subsidies

Note: other supply-side policies do not involve fiscal policy (i.e. deregulation, labour market reform)

62
Q

Define the term free market supply side policies

A

Policies to increase the productive capacity by making markets work more efficiently

63
Q

Define the term interventionist supply side policies

A

Policies to increase the productive capacity by direct intervention in the macro economy (i.e. spending on infrastructure)

64
Q

Explain the supply-side policies and the natural rate of unemployment (NRU)

A

The NRU consists of voluntary, frictional and structural unemployment.
It can be reduced by supply side policies i.e.
- Improvements to education to reduce factor immobility
- Incentives to increase training
- Investment in infrastructure
- Lower taxes on incomes
- Less generous welfare benefits
- Encouraging R&D

65
Q

The level of employment in an industry can also be studied using what?

A

Labour market analysis

66
Q

What are the 6 limitations of supply side policies?

A

Tax cuts often favour high-earners
Welfare cuts fall disproportionately on lower income earners
Relative poverty is increased
There is a long time-lag with most policies
Investment in infrastructure is expensive and may be wasted
Worker’s rights are reduced

Economics - Chapter 8 (10 decks)

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