Chapter 16 - How Is Government Financed? Flashcards
What are the most important outlays of government recurrent expenditure?
1: transfer payements
2: health
3: education.
4: public debt services ( the amount of money the government pays to service its debts.)
What is Government Capital Expenditure?
Refers to the governments investment in new roads, school buildings , weapons , hospital buildings ect.
What does the government spend money on?
1) Public goods
2) Merit goods
3) Social goods
4) Control of the economy
5) Overseas spending
What is Government Recurrent expenditure?
It refers to the day-to-day running of the government departements. Example: social security benefits–> payments made to people who are not productive in the economic sector such as children allowances, pensions and unemployment benefits. These are known as transfer payements.
What are examples of government revenue?
Income tax ( example VAT) , Social Security Contributions and Loans.
Why do we pay taxes?
1) Main way to raise money for gov
2) raise prices and reduce consumption of harmful goods
3) reduces differences in incomes and gives opportunity to provide for the less well off
4) make foreign goods more expensive
5) raising taxes can reduce the amount the consumer spends and lowering can boost employment taxes
6) protect env
What is a good tax?
1) Must be fair
If many people think a tax is unfair it is unlikely for people to pay it.
2) Must not discourage people to work.
If taxes are too high , people may then decide that there is no use in trying to earn more.
3) Cheap to collect
There is little point in introducing a tax if it costs more money to collect than it earns in revenue for the government.
4) convenience
Taxes should be made in a way which they are easy to pay and to understand.
What is a tax system and how is it divided?
A tax system is all of the taxes together of a country. It is divided into three : progressive , regressive and proportional.
Progressive : the higher the income = the higher the tax
Regressive : the higher the income = the lower the tax
Proportional : no matter how much income you receive = same amount of tax for everyone
What are the types of direct tax?
1) Corporation tax
2) Inheritance tax
3) Income tax
4) National Insurance Contributions
5) Capital gains
What are the advantages of direct tax?
1) Revenue
2) Redistribution
3) Ability to pay
What are the disadvantages of direct tax?
1) If taxes are high it may discourage people to work harder to earn more income as they know they will be taxed more
2) Enterprise (corporation tax on firms)
3) Tax evasion
What are the advantages of indirect tax?
1) Cost of collection
2) Wider tax base
3) Selective aims
4) Tax alterations
What are the disadvantages of indirect tax?
1) regressive
2) prices
3) uncertainty
What is the Budget?
An estimate on government spending and revenue for the coming year.
Budget deficit- exp greater than revenue
Surplus - revenues greater than exp
Balanced budget - equal
What is a PSBR?
Public sector borrowing requirement. Central gov + local gov + public corporations
