Macro A2 - Taxation

Question 1

Main types of tax:

Answer 1

Income tax
National insurance
VAT
Capital gains tax
Stamp duty
Tobacco, spirit, wine & beer duties
Fuel duties
Betting & Gambling duties
Air passenger duties
Insurance premiums tax
Landfill tax
Climate change levy
Aggregates levy

Question 2

Indirect tax

Answer 2

Levied on goods & services

Question 3

Examples of Indirect tax

Answer 3

VAT
Sugar tax
Sales tax

Question 4

Direct tax

Answer 4

Levied directly on individuals & companies

Question 5

Examples of direct taxes

Answer 5

Corporation tax
Income tax

Question 6

Progressive tax

Answer 6

A tax where the marginal rate of tax rises as income rises

Question 7

Examples of Progressive tax

Answer 7

Income tax

Personal Allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £150,000 40%
Additional rate Over £150,000 45%

Question 8

Proportional tax

Answer 8

The margin rat e of tax is constant leading to a constant average rate of tax

Question 9

Examples of Proportional tax

Answer 9

National insurance

Question 10

Regressive tax

Answer 10

The rate of tax paid falls as income rises

Question 11

Examples of Regressive tax

Answer 11

Duties on tobacco & alchol

Question 12

A good tax system should be (Adam smith)

Answer 12

Low cost of collection.
Timing and amount of collection should be clear and certain.
Should be convenient to the taxpayer.
Should be levied according to the ability to pay.

Question 13

Disadvantages of taxation

Answer 13

High marginal rates of tax discourages economic activity.
High corporation tax prevents firms from producing.
High income tax spots people from working.

Question 14

The Laffer curve

Answer 14

Shows the relationship between economic activity and taxation. It suggests that there is a optimum tax rate that maximises total tax revenue

Question 15

Reasons that tax revenues may fall if the tax rate increases

Answer 15

Tax avoidance
Tax evasion
“Brain drain” effect
Disincentives to work

Question 16

Tax avoidance

Answer 16

Tax avoidance is the legal usage of the tax regime in a single territory to one’s own advantage to reduce the amount of tax that is payable by means that are within the law

Question 17

Tax evasion

Answer 17

Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others

Question 18

The “brain drain” affect

Answer 18

Brain drain is a slang term that indicates a substantial emigration or migration of individuals. A brain drain can result from turmoil within a nation, the existence of favourable professional opportunities in other countries, or a desire to seek a higher standard of living.

Question 19

Evaluating the Laffer curve

Answer 19

Not just tax that influences if people work.
Some are on fixed/0 hour contracts so dont know how much they actually work.
If they get tax cuts it may cause people to work less anyway.
Cuts in indirect tax may increase AD.

Question 20

How tax distributes income

Answer 20

Taxes on higher incomes more than those on lower income.
Increase in VAT leads to unfair income distribution (poorer people pay more as a percentage).
Raise in top rate of income tax leads to fairer distribution.

Question 21

Effect of tax rates on Real output & employment

Answer 21

Increase in tax reduces AD (income tax)
Increase in tax reduces AS (VAT, Excise duty)

Question 22

How taxation affects trade balance & FDI

Answer 22

Increase in investment in the economy and increases tax revenue for the Government.
Some countries encourage FDI investment by Lower tax rates (corporation tax).

Question 23

FDI

Answer 23

Foreign direct investment (FDI) is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.

Question 24

Tax evasion

Answer 24

Tax avoidance involves using legal loopholes to avoid a liability to pay tax to a government.

Question 25

Tax avoidance

Answer 25

Tax evasion means concealing income or information from tax authorities and it’s illegal.

Question 26

Uk tax avoidance & tax evasion figures

Answer 26

Latest HMRC estimate of non-compliance £32bn, or 5.1% of total tax revenues