Government finance Flashcards
why is the public sector needed
public goods would not exist, e.g. street lighting
merit goods would be under-provided, e.g. education
without government intervention and regulation, demerit goods, e.g. cigarettes, would be over-provided
some sections of society need assistance with the provision of basic needs
it provides a method of making income distribution fairer
what are the cannons for taxation
Equity - Taxes should be charged according the ability to pay.
Efficiency - Taxes should be relatively inexpensive to collect.
Certainty - The taxpayer should know how much tax he or she is to pay.
Convenience - Taxes should be paid when suitable to the taxpayer.
what are direct taxes
taxes on income and wealth.
what are indirect taxes
taxes on spending usually paid indirectly to the seller
what are examples of direct taxes
Income Tax - Tax on wages and salaries;
National Insurance (NI) contributions - Contribution from wages and salaries;
Corporation Tax - Tax on company profits;
Council Tax - Tax paid depends on the value of domestic property owned;
Business rates - Tax paid by companies on property owned;
Capital Gains Tax (CGT) - Tax levied on the increase in value of assets owned, e.g. interest earned on money in the bank;
Inheritance Tax - Tax levied on a deceased person’s estate;
Stamp duties - Tax levied on the change of ownership of houses and land.
what are examples of indirect taxes
Value Added Tax (VAT) - Tax levied on a wide range of goods and services bought in the UK;
Customs duties - Taxes on imports;
Excise duties - Taxes on petrol, alcohol and tobacco;
Petroleum Revenue Tax (PRT) - Tax on revenues of oil companies in UK;
Motor vehicle duties - Tax paid to use motor vehicles on UK roads.
why may the government need to borrow money
if spending is greater than revenue
what are two examples of government revenue other than taxes
speeding fines and prescriptions
what is a progressive tax
one which takes account of a person’s ability to pay. A progressive tax takes a larger percentage of income as income rises. Most direct taxes in the UK are progressive.
what is a regressive tax
takes no account of a person’s ability to pay. Lower income earners pay a higher percentage of their income in tax, e.g. through VAT and excise duties, than higher income groups. Most indirect taxes are regressive.
what are the positives for a shift from direct to indirect taxation
Cutting rates of income tax may increase tax revenues - High rates of tax encourage high earners to avoid payment. They try to exploit the tax through loopholes. Lower rates may discourage this avoidance.
Incentives to earn are encouraged - If people are able to keep more of what they earn this will encourage them to work harder and unemployed people would be encouraged to take employment. Both of these will increase tax revenues further and encourage economic growth.
People have more choice - Consumers of all income levels can reduce their tax burden by choosing not to buy those products on which duty is charged, e.g. cigarettes and alcohol. This will lead to a healthier population and a cleaner environment.
what are the negatives for a shift from direct to indirect taxation
Tax revenues may not increase - Higher take home pay may make people decide that they need not work as long. They may take more leisure time so there is no increase in tax revenues.
Higher demand in the economy may lead to inflation - Higher take-home pay may lead to spending rising faster than output and so prices will creep upwards. Higher price tickets because of VAT and other tax increases will also cause inflation.
The distribution of income and wealth will be more uneven - Income tax is progressive and so cuts will favour most those on higher incomes. Indirect taxes are regressive and so increases will increase the burden on lower income groups.
what are the three types of public spending
Capital spending - This is spending on capital, e.g. buildings, machinery and infrastructure.
Current spending - This covers day to day running costs of central and local government, e.g. teachers’ wages, repairs and medicines.
Transfer payments - These are payments to individuals or firms for which there is no economic benefit given in return, e.g. pensions, Jobseeker’s Allowance and Child Benefit. It is money transferred from earners to non-earners.
what are public goods
goods which benefit everyone in society, e.g. defence and law and order. Non-payers cannot be excluded from the benefits of public goods. This makes it impossible to make a profit from their provision. The private sector cannot provide it via the price mechanism. The government provides public goods and raises the required money through taxation.
what are merit goods
goods which would be under-consumed if left to the private sector to produce. The price of private provision would be too high for many so some of the population could not afford them or would not spend the money on them. The UK economy benefits from a well-educated and healthy population. Therefore the government provides these services. State education and the National Health Service are examples of the government funding merit goods.
