T4 ROLE OF THE STATE Flashcards
What is a Progressive Tax
With a progressive tax, the proportion of income, profit or price you pay in tax will increase as your income, profit or price increases.
What is a regressive tax
With a regressive tax, the proportion of income, profit or price you pay in tax will decrease as your income, profit or price increases.
What is a proportional tax
Size of the tax is proportional to the size of income.
What are direct taxes
Direct taxes are paid directly to the government.
This includes income tax and corporation tax, which is a percentage of profits.
What are indirect taxes
Indirect taxes are paid by the producer when the consumer purchases the product.
One example is Value added tax.
what does the laffer curve show
The relationship between the tax rate and tax revenue
Negative parabola shape
Why would an increase in direct taxes, increase equality?
Direct taxes, like income tax, are often progressive.
This means that the proportion of tax paid increases as income increases.
Therefore an increase in direct tax often means that the rich will end up paying more tax.
This will decrease the gap between the rich and poor - there will be more equality.
why would an increase in indirect tax, lead to increased inequality?
Indirect taxes, like VAT, are often regressive.
The poor spend a much higher % of their income and so they end up paying a higher percentage of their income in VAT.
Increasing the gap between the rich and the poor
what would an increase in direct taxes do to the price level?
An increase in direct tax means that workers keep less of their income and businesses keep less of their profit.
This is likely to reduce consumption and investment, which will decrease AD.
A decrease in AD will then decrease the price level.
what would an increase in indirect taxes do to the price level
Indirect taxes are paid by the producer when the consumer purchases the product.
An increase in VAT will make goods and services more expensive, which will decrease consumption.
This will then decrease AD and decrease the price level.
what is meant by a trade balance
total value of exports - total value of imports
which indirect tax can have an effect on the trade balance
tariffs ( indirect taxes placed on imports)
What effect would a lower income tax rate have on FDI?
The lower income tax rate meant that FDI flows into the UK increased.
This is because the UK became a more attractive place to invest as managers knew they would be able to keep more of their income.
What effect would increasing indirect taxes have on FDI?
Increasing indirect taxes will mean that goods and services become more expensive which might mean that consumers buy less and so firms make less profit.
This is likely to put investors off and so FDI will decrease.
What does public expenditure mean
Term which describes how the government spends all its money
What does capital expenditure refer to
Government spending on projects/assets that have long term benefits/effects
The level of skill and knowledge in a population is known as
human capital
what is current expenditure
what the government spends on recurring costs. This could include wages or raw materials.
what are transfer payments
Spending a government makes without anything in return
Pensions, benefits etc
what are the three types of public expenditure
capital expenditure
current expenditure
transfer payments
Which type of public expenditure isn’t included in the g part of the ad formula
transfer payments
what are the factors influencing public expenditure
age distribution
incomes
political values
due to having an ageing population what does Japan spend a significant amount of its GDP on
Japan spends 10% of its GDP on pensions
What is Wagner’s law?
the theory that demand for government goods and services in income elastic
why may increased public expenditure not lead to improved productivity and growth
if lots of money is spent inefficiently on bureaucracy, it will have no effect on growth.
What is meant by resource crowding out?
When all resources in an economy are being used efficiently.
And when public expenditure decreases the resources available to the private sector.
what is financial crowding out?
Financial crowding out occurs when an increase in government borrowing increases the demand for borrowed money, which then increases the interest rate. Thus decreasing private sector investment.
what is budget deficit
A budget deficit occurs when public expenditure is greater than tax revenue.
what is meant by the business cycle ?
Fluctuations in real GDP over time
What is meant by cyclical deficit
During a recession unemployment is high, public expenditure is high and tax revenue is low. This creates a budget/cyclical deficit.
What are structural budget deficits
Structural deficits are the budget deficits that remain at any stage of the business cycle
why is structural deficit worse than cyclical
structural deficit persists through the business cycle
what is national debt
National debt is the government debt built up by government borrowing over time.
What is the likely impact of a high national debt on future generations?
A high national debt will need to be paid back at some point. In order to do this, the government will either need to increase taxes or decrease public expenditure - or a combination of both.
