Macro - How does the UK government raise and spend its money

Question 1

Describe direct taxes

Answer 1

A tax that is imposed on income or wealth

e.g. income tax, inheritance tax

Question 2

Describe indirect taxes

Answer 2

A tax that is imposed on a good or service

e.g. VAT, excise duties

Question 3

What are the main areas of UK government spending(34)

Answer 3

Social Protection (Benefits and Pensions etc), Health, Education and Defence

Question 4

What are the main sources of UK government revenue

Answer 4

Different forms of taxes(direct and indirect taxes)

Question 5

What are progressive taxes

Answer 5

As your income rises, you pay a bigger proportion of your income in taxation

e.g. income taxes

Question 6

What are the advantages and disadvantages of progressive taxes(2+1)

Answer 6

Pros:

• Fairer
• Can be used to redistribute income

Cons:
-Progressive taxes can have a disincentive effect(less likely to work hard as the reward is less)

Question 7

What are proportional taxes

Answer 7

As your income rises, you pay the same proportion of your income in taxation

Question 8

What are the advantages and disadvantages of proportional taxes(1+1)

Answer 8

Pros:
-less of a disincentive effect than a progressive tax

Cons:
-Some would argue that the rich can afford to pay a bigger proportion of their income

Question 9

What are regressive taxes

Answer 9

As your income rises, you pay a smaller proportion of your income in taxation

e.g. VAT (and all indirect taxes)- everyone pays the same actual amount of tax but this will vary as a proportion of their income

Question 10

What are the advantages and disadvantages of regressive taxes(1+1)

Answer 10

Pros:
-No disincentive effects

Cons:
-Increased inequalities - unfair for the poor

Question 11

What are the advantages of direct taxes

Answer 11

Are often more progressive

-This means that they are regarded as fairer and can be used to re-distribute income

Question 12

What are the disadvantages of direct taxes(3)

Answer 12

High rates of direct tax can have a disincentive effect.

High direct taxes on businesses can add to costs and contribute to UK firms being uncompetitive

Very noticeable

Question 13

What are the advantages of indirect taxes(2)

Answer 13

Less noticeable to us

Have less disincentive effects therefore are less likely to affect the supply side of the economy and GDP

Question 14

What are the disadvantages of indirect taxes

Answer 14

Are likely to be unfair as indirect taxes are regressive

Question 15

What is distribution and redistribution of income

Answer 15

Distribution of income - how the total income of a country is shared out among the people of the country

Redistribution of income - a policy to reduce the inequalities of income so that incomes are distributed more evenly

Question 16

Describe why income and wealth is unevenly distributed(2)

Answer 16

Occupations with a low demand and high supply will pay a low wage

High skilled jobs pay a high wage since there is a limited supply of people

Question 17

Explain how redistribution of income and wealth can be achieved through taxation and government spending(2)

Answer 17

Take more taxes from the higher-income groups and give more in benefits to the lower income groups
-these benefits are also called transfer payments(e.g. Jobseeker’s Allowance)

Question 18

Describe the advantages of redistribution of income(3)

Answer 18

It relieves absolute and relative poverty

If poor people are given money they spend a high proportion of it- this goes back into the economy and creates demand for goods and jobs

Living standards will be increased because the poor will value the money more than the rich did

Question 19

Describe the disadvantages of redistribution of income(5)

Answer 19

Progressive taxes have disincentive effects

• They may deter people from getting jobs or working harder.
• Cause the GDP in the economy to be lower than it otherwise would be
• This will also mean that tax revenues are lower

The poor may be better off if the economy is allowed to grow as this will provide more jobs and greater tax revenue to re-invest

Question 20

Evaluation of whether redistribution of income is good or bad(3)

Answer 20

Depends how high the progressive tax is

• high progressive tax can cause a disincentive to work
• high progressive tax can cause high earners to move abroad to escape the tax

Depends on how high the benefits are
-if the benefits are too high then there might be a disincentive to work as the people can live well enough on benefits

Question 21

How can taxation be used to correct market failures

Answer 21

Can impose a tax on a good or service with negative externalities in order to deter its consumption

Question 22

Describe the advantages and disadvantages of using taxation to correct market failures(2+1)

Answer 22

Advantages:

• deters people from consuming these products
• tax creates revenue that can be used to address the issue

Disadvantages:
-taxes are not effective in reducing consumption because the demand for these products is price inelastic

Question 23

What other methods can be used to reduce consumption of goods with external costs(3)

Answer 23

Legislation (eg bans)

Subsidising alternatives

Advertising campaigns about the external costs

Question 24

How can you evaluate methods used to reduce consumption of goods with external costs(5)

Answer 24

Will they work (diagrams)

Cost of the policy

Opportunity cost of the policy

Likely price inelastic demand and implications(e.g. petrol is price inelastic therefore increasing taxes would have very little effect)

Possible disincentive effects

Question 25

What methods can be used to increase consumption of goods or services with external benefits(2)

Answer 25

Subsidies

Advertising campaigns about the external benefits

Question 26

How can you evaluate methods used to increase consumption of goods or services with external benefits(4)

Answer 26

Will it work?

Efficiency

Cost to the government

Opportunity cost to the government

Question 27

What are negative externalities

Answer 27

Cost that is suffered by a third party as a result of an economic transaction

Question 28

What are market failures

Answer 28

When the market fails to allocate resources in the best interests of society as a whole