Role Of The State In Macroeconomy - Tax

Question 1

Types (3)

Answer 1

Proportional
Progressive
Regressive

Question 2

What proportional (4)

Answer 2

Fixed rate for all regardless of income
In so dense of tax = equal
Incentive to earn higher income
America

Question 3

Progressive (3)

Answer 3

Uk
Tax rate increases as you earn more = tax thresholds
Based on ability to pay

Question 4

Regressive (3+)

Answer 4

Those on lower income pay more
London congestion charge = on average poorer having higher emitting cars = diesel not electric
VAT = 20% = could be argued as proportional

Question 5

What ladder curve (3)

Answer 5

Shows how much tax revenue gained by the government
Argues tax rate should be reduced to encourage people to re-join workforce
1 in 5 don’t work

Question 6

What loafer curve look like (4+)

Answer 6

Bell curve
Y = tax revenue
X = tax rate %
Top of curve = tax rate had become to high so it become disciencentice to work

Question 7

Uk tax (2)

Answer 7

Highest tax rate = income tax = 45% = some find this too high
1979 under labour = top band was 83%

Question 8

1979 application (4)

Answer 8

Prime example of ladder curve
Major brain drain = workers left uk
Gov tax revenue fell = market failure
1988 Margaret thatcher made it 40%

Question 9

Main role of taxation + example (4)

Answer 9

Income redistribution = transfer payment = take from rich + give to poor
Example = inheritance tax:
Rich families cannot keep wealth in stock assets
40% rate

Question 10

Economic effects of change in tax - expansionary fiscal policy (5)

Answer 10

Expansionary fiscal policy = increase in AD + output
Positive = no inflationary pressure prior to policy = LRAD
Positive = want inflation of 2%
However = worsening gov budget deficit = borrow more
However reduced tax = reduced revenue

Question 11

What is crowding out (3)

Answer 11

When a gov increases gov spending in an economy
This crowds out private sector investment
Puts private businesses off of investing as they feel they can’t compete and make profit

Question 12

Example of crowding out

Answer 12

NHS - lot less private sector in UK compared with Germany and France

Question 13

What does crowding out cause (2)

Answer 13

Reduces AD
Because I reduces

Question 14

Contractionary/deflationary fiscal policy when (3)

Answer 14

Economy is overheating
BOOM
Increased AD = increased Y and employment = demand pull INFLATION above 2%

Question 15

What contractionary fiscal policy (3)

Answer 15

Raise tax
Cut gov spending
C -p+ GS falls so AD falls however could lead to RECESSION

Question 16

Example of UK using contractionary policy (3+)

Answer 16

Have reduced NI by 2 pence = fiscal drag
However the tax thresholds haven’t changed + NMW has risen by £1 (10%)
Therfore more people ar paying in the higher tax band

Question 17

Example of increased tax spending - NI

Answer 17

People who earn 15000 or less will now pay an extra estimated 500 in tax in next 12 months

Question 18

Economic effects of change in tax - price level (3+)

Answer 18

Indirect tax could cause cost push inflation = always supply shift because CoP first
If price inelastic = price pushed on consumer = change angle of D curve
Still cost push because effect supply

Question 19

Economic effects of change in tax - trade balance (3)

Answer 19

Tariff = in theory should improve BoP because UK C will buy domestic goods = J curve
However = imports may still be cheaper because cheaper labour abroad = C.P.I
This is because uk has NMW

Question 20

Economic effects of change in tax - FDI flows (3)

Answer 20

If reduce corporation tax = increased FDI
Republic of Ireland rate = 11% corp tax (LOW)
Apple, Google, Starbucks all set headquarters in Rep of Ireland