Fiscal Policy

Question 1

What are the 4 main objectives of the UK tax system?

Answer 1

1. Funding Gov spending
2. Managing economy as a whole: impacts inflation, employment, growth etc.
3. Redistribution of income (progressive tax)
4. Correcting market failure

Question 2

Direct taxes?

Answer 2

Taxes levied directly on the income of an individual or organisation, e.g income tax

Question 3

Indirect taxes?

Answer 3

Taxes on spending that the consumer pays e.g VAT

Question 4

What are the principles of taxation? (Canons of taxation)

Answer 4

1. Economical= simple+cheap to collect
2. Equitable= horizontal equity (people with same incomes pay same amount of tax, e.g thatchers poll tax)
3. Convenient
4. Certain= taxpayers should understand system
5. Efficient
6. Flexible= easy alteration in response to changing economic conditions

Question 5

What is the ‘canons of taxation’?

Answer 5

The characteristics of a ‘good tax’, made my Adam Smith

Question 6

Hypothecation?

Answer 6

When taxes are earmarked for a specific purpose

E.g tampons tax pumped into female activist movements

Question 7

What is the benefit principle?

Answer 7

The argument that taxes should be linked to the benefits received by taxpayers.

Question 8

Pros of indirect taxation?

Answer 8

• influences spending patterns= can change demand for certain goods
• corrects externalities (e.g de-merit goods)
• consumer choice

Question 9

Objectives of fiscal policy?

Answer 9

• Taxation

* Gov spending

Question 10

Cons of indirect?

Answer 10

• distribution effects= earn more but pay same tax as someone who earns less
• inflationary effects (cost-push)
• crime (avoidance)

Question 11

Pros of direct?

Answer 11

• considered fairer (progressive tax)
• predictable
• easy for Gov to raise revenue

Question 12

Cons of direct?

Answer 12

• avoided, especially by big firms
• discourages saving/investing
• time taken to collect

Question 13

What is crowding out?

Answer 13

When Gov spending fails to increase overall AD as higher spending causes an equivalent fall in private sector spending+investment

E.g increase AD increases interest rates, affecting private investment decisions

Question 14

Multiplier effect?

Impact of a tax cut?

Answer 14

=an initial change in AD causes a greater final impact on the level of equilibrium national income

• if Gov cut VAT, consumers have more disposable income
• assuming they have same spending habits, they will buy more goods
• encouraged to buy more as cheaper
• higher demand=more selling of goods, thus a higher output
• firms may employ more workers, increasing income even further

Question 15

What are the 4 different types of taxation?

Answer 15

1. Consumption and environmental= VAT, fuel, tobacco
2. Personal income= income tax, national insurance
3. Business income+wealth= corporation tax
4. Capital+other receipts= inheritance tax

Question 16

What is the difference between the UK national debt and budget deficit?

Answer 16

=total amount of money Gov owes to private sector+other purchasers of UK gilts (bonds issued by some national Gov’s)

=the amount the Gov has to borrow per year

Question 17

What is the stability and growth pact?

Answer 17

=an agreement among the 28 members of the EU to maintain the stability of the euro through fiscal policies

Question 18

Expansionary fiscal?

Contractionary fiscal?

Answer 18

= increasing gov spending/decreasing tax

=decreasing gov spending/ increasing tax

Question 19

5 reasons why national debt has changed over past years?

Answer 19

• 1990s financial restraint to lower debt
• 2002-07 increased as Gov spent more on healthcare+education
• 2008 recession