Income tax Flashcards
progressive tax
With a progressive tax, the proportion of income, profit or price you pay in tax will increase as your income, profit or price increases.
eg. income tax
Example of regressive tax
One example of a regressive tax is the UK’s National Insurance tax.
Example of proportional tax
One example of a proportional tax is corporation tax.
Progressive Tax
With a progressive tax, the proportion of income, profit or price you pay in tax will increase as your income, profit or price increases.
Regressive Tax
With a regressive tax, the proportion of income, profit or price you pay in tax will decrease as your income, profit or price increases.
Proportional Tax
With a proportional tax, the proportion of income, profit or price you pay in tax will stay the same as your income, profit or price increases.
Which of the combinations above shows the most likely impact of a change in direct and indirect taxes on the incentive to work ?
Direct taxes are paid directly to the government. They include income tax and corporation tax, which is a percentage of profits. An increase in direct taxes is likely to decrease the incentive to work. This is because you are able to keep less of your income, meaning you may work fewer hours.
Indirect taxes are paid by the producer when the consumer purchases the product. This includes Value Added tax. An increase in indirect taxes is likely to increase the incentive to work. This is because products will become more expensive, so people will want to work more hours to earn more so that they can buy the same amount of products.
As the rate of corporation tax increases beyond a point, tax revenue will decrease for a few main reasons:
- A decrease in the incentive to to set up and grow companies. Setting up and expanding companies is a big risk. If people know that the government will take a large % of their profit then they are less likely to take this risk.
- A decrease in Foreign Direct Investment - fewer companies will choose to invest in the economy as they know that the government will take a large % of their profit.
- An increase in tax evasion and avoidance. Companies are more likely to try and find ways to avoid paying corporation tax if the rate increases.
- A decrease in tax revenue from other taxes. If companies can keep less of their profit then they have less money to pay workers. They may choose to hire fewer people, which will decrease income tax revenue. Also, an increase in corporation tax might mean that companies increase their prices, which can lead to a decrease in consumption and therefore a decrease in VAT revenue
As the rate of income tax increases beyond a point, tax revenue will decrease for a few main reasons:
- A decrease in the incentive to work. People work fewer hours and earn less income and therefore pay less income tax.
- An increase in tax evasion and avoidance. People are more likely to try and find ways to avoid paying income tax if the rate increases.
- A ‘brain drain’ - highly skilled and productive high earners may choose to move to a different country where they are able to keep more of their income. This means that the government will receive none of their income tax
Which of the following shows the likely impact of a decrease in the rate of income tax for the highest earners?
A decrease in the top rate of income tax is likely to increase income inequality. This is because the rich will be able to keep more of their income and so they will be richer - and therefore the gap between the rich and poor will increase.
What is the impact of an increase in aggregate demand on the price level?
An increase in AD is likely to increase the price level. This is called demand pull inflation and is shown on the graph below.
Which of the combinations above shows the most likely impact of a change in direct and indirect taxes on the distribution of income?
Direct taxes are paid directly to the government. They include income tax and corporation tax, which is a percentage of profits. Direct taxes, like income tax, are often progressive. This means that the proportion of tax paid increases as income increases. So, an increase in direct tax often means that the rich will end up paying more tax. This will decrease the gap between the rich and poor - there will be more equality.
Indirect taxes are paid by the producer when the consumer purchases the product. One example is Value Added tax. Indirect taxes, like VAT, are often regressive. The poor spend a much higher % of their income (they have a higher MPC) and so they end up paying a higher percentage of their income in VAT. This increases the gap between rich and poor - there will be more inequality.
What will an increase in AD do to labour n output
An increase in AD will increase the derived demand for labour because consumers will be demanding more goods and services. It will also increase real GDP, as shown below, which will lead to an increase in output.
A trade balance
A trade balance is the total value of exports minus the total value of imports .
What effect will an increase in Value Added Tax have on the UK’s trade balance?
An increase in VAT has no impact on the price of imports. Most indirect taxes are placed on goods which are made and sold in the country. If it does not change the price of imports, then a change in VAT will not have a significant impact on the trade balance.
