Macroeconomic Policy Flashcards
What is the Lorenz curve?
A graph which indicates income inequality by plotting the cumulative % of total national income against the cumulative % of the corresponding population (ranked in increasing size of share).
What is the Gini index?
A statistical measure if the level of income inequality in an economy calculated by analysing the size of any inflexion in the Lorenz Curve.
Gini index formula
Gini index = A/B
0 = Total equality
1 = Total Inequality I.e A = B
Why do we have taxes?
- Manage the economy
- Redistribute income and wealth
- Fund public and merit goods
- Discourage de-merit goods
What are the principles of taxation?
- Easy to collect and administer
- Collects a high proportion of taxes due
- Does not lead to inefficient behaviour
- Easy to understand
- Equitable - vertical and horizontal
vertical (ranging incomes high/low)
horizontal (same income levels)
What are the 3 taxation structures?
- Percentage of earnings (proportionate)
- Percentage that rises with income
(progressive) - Fixed rate
(regressive)
Proportionate tax definition
A tax system that takes the same percentage of income from all taxpayers, regardless of income.
Progressive tax definition
A tax system that takes an increasing percentage of income from taxpayers as income rises.
Regressive tax definition
A tax system that takes a reducing percentage of income from taxpayers as income rises.
Examples of direct regressive tax
National insurance
Examples of indirect regressive taxes
VAT
Duties
Examples of direct progressive taxes
Income tax
Inheritance tax
Capital gains tax
Examples of progressive indirect taxes
Stamp duty
Examples of proportionate direct taxes
Corporation tax
Business rates
How does the government address inequality?
Achieve real growth and employment:
- Make direct taxes more progressive
- Provide free services
- Employment regulation
- Level of state benefits
- Public sector pay
- Careful application of indirect taxes
Avoid disincentivising economic activity
