IA4 - External Exam Flashcards
summarise the sources of government income - direct taxation
direct taxation
- any tax that is borne by the person or firm on whom it is levied becuase it cannot be passed on to someone else
- for example income or company tax
summarise the sources of government income - indirect taxation
indirect taxation
- any tax on aspects of economic acitivity other than income
- eg. goods and services tax, carbon tax or customs duty; these can be passed on to others by the firm on which the tax is levied
summarise sources gov. income - revenue from government enterprises
progressive tax
- ## a tax system in which the percentage of tax payable increases as income rises
summarise sources gov. income - revenue from government enterprises
proportional tax
- a tax system in which the ratio of the tax to income remains the same regardless of level of income, ie, percentage of tax payable remains constant
- constant proportion of one’s income
- company tax works on this principle but with lower rates for small firms
summarise sources gov. income - revenue from government enterprises
regressive tax
a tax system in which the ratio of the tax to income is lower with large income than with small incomes
summarise sources gov. income - revenue from government enterprises
income tax
- collected from individual works under a witholding system; ‘pay as you go’ (PAYG)
- most australians use their principal income from wages or salaries
summarise sources gov. income - revenue from government enterprises
other secondary income
- investments, recieved when tax return is filed
- eg. interest earned, rent recieved or capital gains
summarise sources gov. income - revenue from government enterprises
Goods and services tax (GST)
- levied on most goods and services at a fixed percentage of their price (10%)
summarise sources gov. income - revenue from government enterprises
customs duty
- levied on many imported goods
- eg. motor vehicles, textiles
summarise sources gov. income - revenue from government enterprises
Fringe benefits tax
- paid by employees when the value of certain benefits are provided to employees insteas of increased pay
- eg. company vehicle
Incidence of taxation - indirect taxation
what are the main forms of indirect taxation and who are they levied on?
Wholesaler or retailer:
- GST
Manufacturer:
- excise tax
- customs duty
- GST
advantages of indirect tax
- convenient and inexpensive to administer
- to some extent concealed from those on whom they fall
disadvantages of indirect tax
- all forms of regressive taxation are considered by many to be equitable
- they have a much greater impact on the poor than on the rich, and in recent years, with the introduction of the GST, have grown as a proportion of total taxation.
what are the main forms of direct taxation in Australia?
- income tax
- company tax
how does the government use direct taxation to influence economic activity?
- the government can adjust rates of personal income and company tax to stimulate the level of economic activity or reduce it.
what is the foremost purpose of taxation?
raise revene for the government
what is the effect of income tax on:
- unemployed
- lowest income earners
- work ethic
- federal income tax follows progessive tax system; large revenue earners bring about a redistribution of income
- part of revenue is paid in benefits and pensions to aged, unemployed or disadvantaged - lowest income earners pay little or no income tax, and recieve most of their income from the government in pensions and welfare (incurring negative tax rate)
- tax may affect willingness to work –> earning more = more tax paid
what is the effect of taxation on bracket creep and how does this support the argument for GST?
- inflation causes wage increases –> people move into higher tax brackets and pay higher rate of tax
- due to the introduction of GST, it has been possible to lower income taxes for most tax payers
what is the effect of taxation of aggregate level of spending?
- negative effect as less money to spend
- indirect tax - raise prices of goods on which taxes are levied
- if spending by goverment in economy, the leakage of tax cancelled out by injection of government expenditure
- if tax is larger than govt. expenditure, aggregate spending will fall
what is the effect of taxation on patterns of spending and therefore production?
- due to indirect tax discouraging consumption of these goods
- eg. ‘sin taxes’ on alcoholic drinks and tobacco products products through excise duty.
- eg. substancial rise in excise tax on petroleum products helps conserve dwindling reserves and reduces harmful emissions –> tax has reduced the demand for these products
How can taxation encourage domestic products?
- customs duty increases price of imported goods and encourages purchase of domestic goods, increasing domestic production.
- temporary cut in sales tax on motor vehicles has been used in the past to increase sales, which helped the motor vehicle industry and maintained local production and employment in the short term,
define automatic stabilisers
those elements of non-discretionary fiscal policy that operate without the need for government action; that is, they automatically counterbalance changes in the level of economic activity
discretionary fiscal policy
deliberate changes to fiscal policy instruments to influence the level of aggregate demand; also referred to as ‘ structural components of the budget’.
cyclical components of fiscal policy
elements of fiscal policy that are caused by changes in the level of economic activity that impact the level of national income; these are non-discretionary elements of fiscal policy
what is the key idea of fiscal policy
well-targeted discretionary use of fiscal policy, complemented by automatic stabilisers, can infleunce the level of demand in the Australian economy, although the levels of consumption expenditure and private sector investment remian the ket determinants of the level for aggregate demand.
how is the application of fiscal policy guided by macroeconomic objectives
- aims to influence the level of economic activity and economic growth in the Australian economy to achieve the short-run objectives of full employment or stabililty of prices
- counter-cyclical in design, attempting to smooth out fluctuations in the economic cycle by adjusting the level and structure of taxation and government expenditure
how does the fiscal policy relate to consumption decisions of individuals and private sector investment ?
- consumption decisions of individuals account for 60-65% of aggregate demand
- private sector investment generally accounts for 8-14% of aggregate demand
define budget deficit
- a negative budget balance, where receipts fall short of expenditure
- T + charges + income from govt businesses < G
what must budget outcomes be funded by?
- must be funded by government borrowing or the sale of assets
- eg. commonwealth land, real estate or government business enterprises
define budget surplus?
- a positive budget balance, when receipts exceed expenditure
- T + charges + income from gov businesses > G
how can budget outcomes be used as a response to economic cycle downturns?
- can be used to pay down existing govt debt, or carried forward to fund stimulus spending in future budgets as a response to economic cycle downturns
- many govts fund sovereign wealth funds such as Australia’s Future Fund
what are the 3 possible budget outcomes?
- deficit = red shaded section (G > T)
- balanced = income level Yb (G = T)
- surplus = black shaded section (G < T)
- budgets alter the level and composition of a nation’s public assets and debts
why do governments manage budgets?
- promote economic objectives
- respond to fluctuations in the economic cycle
- achieve fiscal balance, on average, over the course of the economic cycle
- governments don’t generally aim for fiscal balance in the short-run
what impacts fiscal policy?
- fiscal policy may be automatic or the result of deliberate government policy decisions
- a budget structural change (deliberate action to change tax rates and expenditures in the budget)
- a cyclical change (the state of the economy)
