Macro - How does the UK government raise and spend its money Flashcards
Describe direct taxes
A tax that is imposed on income or wealth
e.g. income tax, inheritance tax
Describe indirect taxes
A tax that is imposed on a good or service
e.g. VAT, excise duties
What are the main areas of UK government spending(34)
Social Protection (Benefits and Pensions etc), Health, Education and Defence
What are the main sources of UK government revenue
Different forms of taxes(direct and indirect taxes)
What are progressive taxes
As your income rises, you pay a bigger proportion of your income in taxation
e.g. income taxes
What are the advantages and disadvantages of progressive taxes(2+1)
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)
What are proportional taxes
As your income rises, you pay the same proportion of your income in taxation
What are the advantages and disadvantages of proportional taxes(1+1)
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
What are regressive taxes
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
What are the advantages and disadvantages of regressive taxes(1+1)
Pros:
-No disincentive effects
Cons:
-Increased inequalities - unfair for the poor
What are the advantages of direct taxes
Are often more progressive
-This means that they are regarded as fairer and can be used to re-distribute income
What are the disadvantages of direct taxes(3)
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
What are the advantages of indirect taxes(2)
Less noticeable to us
Have less disincentive effects therefore are less likely to affect the supply side of the economy and GDP
What are the disadvantages of indirect taxes
Are likely to be unfair as indirect taxes are regressive
What is distribution and redistribution of income
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
Describe why income and wealth is unevenly distributed(2)
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
Explain how redistribution of income and wealth can be achieved through taxation and government spending(2)
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)
Describe the advantages of redistribution of income(3)
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
Describe the disadvantages of redistribution of income(5)
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
Evaluation of whether redistribution of income is good or bad(3)
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
How can taxation be used to correct market failures
Can impose a tax on a good or service with negative externalities in order to deter its consumption
Describe the advantages and disadvantages of using taxation to correct market failures(2+1)
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
What other methods can be used to reduce consumption of goods with external costs(3)
Legislation (eg bans)
Subsidising alternatives
Advertising campaigns about the external costs
How can you evaluate methods used to reduce consumption of goods with external costs(5)
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
What methods can be used to increase consumption of goods or services with external benefits(2)
Subsidies
Advertising campaigns about the external benefits
How can you evaluate methods used to increase consumption of goods or services with external benefits(4)
Will it work?
Efficiency
Cost to the government
Opportunity cost to the government
What are negative externalities
Cost that is suffered by a third party as a result of an economic transaction
What are market failures
When the market fails to allocate resources in the best interests of society as a whole
