L17- Taxation

Question 1

types of tax

Answer 1

-progressive taxation
-proportional taxation
- regressive taxation

Question 2

what is progressive taxation

Answer 2

as income rises, a larger percentage of income is paid in tax e.g. UK income tax

Question 3

what is Proportional taxation

Answer 3

the percentage of income paid in tax is constant, no matter what the level of income
- incentive to earn higher income

Question 4

what is regressive taxation

Answer 4

as income rises, a smaller percentage of income is paid in tax e.g. VAT

Question 5

what does the laffer curve show

Answer 5

• how much tax revenue the govt. receives at each level of tax
  -as tax rates increase, govt tax revenue increases. -After ‘T’, people do not think it is as worthwhile working, and the lack of incentive to work leads to falling tax revenue.
  -‘T’ is the optimum tax rate where the govt. can maximise their revenue.
  -Laffer argued tax rates too high= disincentive to work.
• incentivise ppl by decreasing tax rates

Question 6

what do increasing tax rates lead to

Answer 6

• more tax evasion and tax avoidance
• more tax exiles

Question 7

direct taxes impact on real output, employment and price level

Answer 7

• income tax , national insurance= decrease disposable income= less consumption= AD down= output down= firms reduced need for goods and services= employment down, inflation down
  -indirect taxes increase cost of goods like cigarettes and fuel- producers pass on cost to consumers due to inelasticity
• also disincentivise ppl to work= no. hours worked and willingness to be employed= labour is fop= LRAS down= economic growth down

Question 8

eval of direct taxation

Answer 8

• if tax revenue is spent on supply side policies or increased govt, spending

Question 9

how can tax affect income redistribution

Answer 9

• inheritance tax- rich cannot keep entire wealth= equality up
• switch to indirect taxes (UK in last 2-3 decades)= more regressive than direct= tax rate fell= workers keep more income= but benefits of this favour rich= equality down

Question 10

how can tax affect trade balance-

Answer 10

• tariffs- more expensive to import goods= imports less competitive= fall in demand for imports= in theory improve trade balance
  -however other countries may retaliate so exports may decrease as well

Question 11

how does tax affect incentive to work

Answer 11

-VAT and other indirect tax raise the price of goods and services= consumers will likely need to reduce consumption given they have a fixed disposable income= BUT some consumers may seek to maintain their standard of living by earning more money.
-Increases in indirect taxation could therefore increase the incentive to work.

Question 12

how does increase in tax affect tax revenue

Answer 12

• tax rates rise= goods and services less affordable= demand down
• low tax rates= demand likely to fall by lower proportion than rise in price
• demand likely to fall by larger amount as tax rates rise- goods become less and less affordable as tax rates rise- more consumers seek alternatives on black market (tax on diesel= other cars, public transport, cheaper smuggles diesel)

Question 13

how does tax affect FDI flows

Answer 13

• Governments can provide a competitive tax environment to encourage FDI, so that the market is profitable, fair and has macroeconomic stability.
  -Taxes should also be consistent and predictable, so they are business friendly. This would encourage FDI flows.
• High, fickle taxes are likely to discourage FDI flows- raise production costs