Economis Unit 2 Chapter 5 Flashcards
What is a tax?
A compulsory payment to the gov
What is a direct tax?
A tax on income or wealth
What is a indirect tax?
A tax on spending
What does government spend on?
Social protection Health Education Defence Law and order Debt interest
Name some direct taxes
Income - helps re distribute incomes
National insurance contributions - paid by employers and employees it is deducted from wages
Cooperation tax - a tax on profits of companies
Inheritance tax - a tac on the transfer of wealth at the time of death
Name some indirect taxes
VAT - a tax on a wide range of goods and services
Excise duties - taxes on specific range of goods such as tobacco, alcohol, petrol
What are the benefits of direct taxes?
Help reduces inequalities so when they are taken away they are fairer
What are of disadvantages of direct tax?
It harms incentives as people may no longer be willing to work if they are earning what a person on state benefits is earning
May no longer want promotion as the tax deduction is bigger
More noticeable
What are the benefits of indirect taxes?
Less noticeable
People have a choice of wether to pay them or not
What does an indirect tax do?
Effects the pattern of demand for example consumers will reduce consumption of the good with the most tax on it
- the taxes are discriminated against certain industries that now have less output and employment
What is an external cost?
The negative impact of an economic transaction on a third party that is not directly involved in the transaction
What is a demerit good ?
A good or service whose consumption is considered unhealthy or undesirable due to its bad effect on consumers it will be over consumed if left to market forces
Why is their an uneven distribution of income?
Wages
Other incomes
What is the distribution of income?
How incomes are shared out among the people of the country?
What is the redistribution of income?
A policy to reduce the inequities of income so its distributed more evenly
What are inequalities of income?
Incomes are distributed unevenly so some people have a much higher income than others
What are the transfers of payments?
Benefits to citizens which are paid out of tax revenues
What is a regressive tax?
Taxes a greater proportion of income from a lower incomes or takes a smaller percentage of a higher income
What is a proportional tax?
Takes the same proportion of income from all income levels
What is a progressive tax?
Takes a greater proportion of income from higher incomes or a smaller percentage of a lower income
Why are indirect taxes regressive?
If a low income earner and a high income earner purchase the same product than the price on the low income earner will be a higher percentage of their income than the high income earner
Why is income tax progressive?
The tax allowance is a larger percentage of a lower income so the tax is a lower percentage
People on higher incomes pay a higher rate of tax on extra income
Whats the evaluation of distribution of income?
Ensure that families have a basic minimum standard of living
Incentives drop as its not worth getting a pay rise, some may move abroad, this decreases supply side
What is market failure?
When the market fails to allocate resources in the beat interests of society as a whole
What is a production externality ?
When production takes place there can be effects on people in society who are not part of that production process
What is a consumption externality?
Consumption can lead to negative externalities e.g. Cars and pollution
What is a positive externality?
Vacation
What are the government policies regarding externalities?
Taxes and charges Law and regulations Subsidies - incentives to change Provision of merit goods Evaluation- which one is most effective, wider effect
