Fiscal policy : Types of public expenditure and taxation Flashcards
what are the main sources of government revenue ?
taxation - direct /indirect
the sale of good / services by gov earned firms
sale of government owned assets (Privatisation)
what are direct taxes ?
Direct taxes are taxes imposed on income and profits
They are paid directly to the government by the individual or firm
E.g. Income tax, corporation tax, capital gains tax, national insurance contributions, inheritance tax
what are indirect taxes ?
Indirect taxes are imposed on spending
The supplier is responsible for sending the payment to the government
Depending on the PED and PES producers are able to pass on a proportion of the indirect tax to the consumer
The less a consumer spends the less indirect tax they pay
sale of good and services
Government owned firms sometimes charge for the goods/services that they provide
E.g. Charges on public transport and fees paid to access some medical services
The sale of government owned assets
Privatisation can generate significant government revenue during the year in which the government sells the asset
Most assets can only be sold once e.g. national airlines or railways
Some assets, such as the right for mobile phone operators to use the airwaves, can be sold every few years (the airway licence is for a defined period of time)
what are the types of government expenditure ?
current expenditures
capital expenditures
transfer payments
what odes government expenditure represent?
Government expenditure represents a significant portion of the aggregate demand in many economies
what is current expenditure?
Current expenditures: These include the daily payments required to run the government and public sector. E.g. The wages and salaries of public employees such as teachers, police, members of parliament, military personnel, judges, dentists etc. It also includes payments for goods/services such as medicines for government hospitals
what is capital expenditure ?
These are investments in infrastructure and capital equipment. E.g. High speed rail projects; new hospitals and schools; new aircraft carriers
what is transfer payments?
These are payments made by the government for which no goods/services are exchanged. E.g. Unemployment benefits, disability payments, subsidies to producers and consumers etc. This type of government spending does not contribute to aggregate demand, as income is only transferred from one group of people to another
what are the reasons for government intervention in markets?
support firms
promote equity
collect government revenue
support poorer households
correct market failure
what can taxes be used for ?
taxes can be used to discourage consumption
Excise taxes (on alcohol, cigarettes) can be used to reduce the consumption of demerit goods that create negative externalities
Tariffs (taxes on imports) can reduce imported goods
what should taxes aid ?
Taxes should aid the redistribution of income
A good tax system should help the government redistribute income from the rich to the poor
Revenue could also be used through the provision of services
Eg. Health care and education promote more opportunities for lower-income earners
what is progressive tax?and diagram
As income rises, a larger percentage of income is paid in tax
In the diagram, when personal income rises from Y1 to Y2, the tax rate rises from TR1 to TR2
what is regressive tax?
As income rises, a smaller percentage of income is paid in tax
In the diagram, when personal income rises from Y1 to Y2, the tax rate falls from TR1 to TR2
All indirect taxes are regressive
what is proportional tax?
As income rises, the same percentage of income is paid in tax
In the diagram, when personal income rises from Y1 to Y2, the tax rate remains constant at 20%
Progressive tax systems are built around the idea of marginal tax rates
The calculation of an individual’s personal income tax requires several calculations
what are the principles of taxation?
simple - taxpayers should know what, when, where and how to pay the tax
fair - taxes should reflect a taxpayer’s ability to pay; progressive taxation aims to achieve this as the wealthy can afford to pay more than the poor do
convenient - systems to collect payment should be easy and provide choice for taxpayers e.g. monthly payments spread over 12 months or tax collected by the employer each month before the salary is paid
efficient- the management of the tax system by the government should not be overly expensive or wasteful
fit for purpose - there should not be any unintended side effects of the system, e.g. disincentivising workers from working
flexible - it should be easy to adjust/change as required by changes in the economy
role of direct taxes
In the UK, income tax is collected by the government through ‘pay as you earn’ (PAYE)
Income tax is cheap to collect, convenient and certain for the taxpayer
It is equitable as it reflects taxpayers’ ability to pay
As tax rates rise, it increases the disincentive to pay tax which creates an incentive to reduce hours worked
The marginal rates of tax should not discourage workers from working overtime
It also lead to a brain drain as people leave the country in order to find countries with more generous tax systems
It is debatable whether or not increasing top rate taxes on income raises extra revenue, or whether it may result in less money being collected
what are capital and wealth
Capital and wealth taxes are considered to be progressive taxes and have the potential to reduce inequality and generate a high level of government revenue
It could discourage the accumulation of large levels of wealth
However, it could act also as a disincentive to declare wealth/capital and tax avoidance / evasion may occur.
There is a risk that they could also discourage the honest declaration of wealth and lead to tax avoidance or evasion
what are indirect taxes ?
Value Added Tax (VAT) is levied on the sale of goods and services. It accounts for roughly 20% of tax revenue
The costs of collection is placed on traders / retailers and not the state. The revenue collected is much greater than the costs of collection
They are harder tax to evade as the tax is built into the selling price they are impossible to evade
As they are included in the selling price, they are convenient for the taxpayer
VAT does not take a person’s ability to pay into account and so the burden falls more heavily on lower income groups
With rising prices it may be a disincentive to spend
what are excise duties levied on
Excise duties are levied on demerit goods such as tobacco, alcohol, sugar
They are always specific or unit taxes, levied on the physical quantity of the good
This tax would bring in much needed revenue for the government that could help fund health initiatives
It could be programmes which fund education on health impacts and act as a disincentive to consume these demerit goods
May lead to hidden market economy activities leading to a loss of revenue for the state
