LS17 - Taxation

Question 1

Progressive taxes

Answer 1

• characterised by higher tax rates as income increases

Question 2

Proportional taxes (flat taxes)

Answer 2

• proportional taxes apply a constant tax rates to all income levels - means individuals pay the same percentage of their income in taxes regardless of their income

Question 3

Regressive taxes

Answer 3

• regressive taxes impose a higher tax burden on lower-income individuals compared to higher-income individuals
• occurs because the tax rates decreases as income increases

Question 4

Economic effects of changes in tax rates on incentives to work

Answer 4

• high tax rates on income may reduce the incentive to work more or to engage in productive activities, especially at higher income levels

Question 5

Economic effects of changes in tax rates on tax revenues (The Laffer Curve)

Answer 5

• The Laffer Curve illustrates the relationship between tax rates and tax revenues
• initially, as tax rates rise, tax revenues increases
• however, at some point, higher tax rates discourage economic activity, leading to a decrease in tax revenues
• finding the revenue-maximising tax rate is a complex challenge for policymakers

Question 6

Economic effects of changes in tax rates on income distribution

Answer 6

• taxation can be used as a tool to redistribute income
• progressive tax systems can help reduce income inequality by imposing higher tax rates on high-income individuals

Question 7

Economic effects of changes in tax rates on real output and employment

Answer 7

• changes in tax rates can affect real output an employment
• lower taxes on businesses and investments may stimulate economic growth and job creation

Question 8

Economic effects of changes in tax rates on price level

Answer 8

• indirect taxes such as sales taxes can influence the price level by increasing the cost of g&s -> higher consumer prices

Question 9

Economic effects of changes in tax rates on the trade balance

Answer 9

• changes in taxes, especially on imports and exports can affect a country’s trade balance
• higher import taxes (tariffs) can reduce imports but may also lead to retaliation by trading partners

Question 10

Economic effects of changes in tax rates on FDI flows

Answer 10

• countries with favourable tax environments for businesses and investors may attract more FDI