Tax structures

Question 1

Describe the tax burden

Answer 1

Taxes reduce the amt of g/s consumers can buy with their income. This reduction of consumers purchasing power is referred to as the tax burden, some taxes impose a greater tax burden on different income earners depending on the tax structure

Question 2

List the 3 types of tax structures (PPR)
peters prickly ripples

Answer 2

Progressive tax structure
Proportional tax structure
Regressive tax structure

Question 3

Progressive tax structure

Answer 3

As income increases, the proportion of income pain in taxes also increases.
Tax rate increases as income increases
(look at graph)

Question 4

Proportional Tax structure

Answer 4

In this tax structure, as income increases, the proportion of income paid in taxes remains unchanged. In other words, the tax rate will remain constant but the amount paid in taxes will increase as income increases eg. corporate tax
As income increases, the tax rate remains the same
look at graph

Question 5

Regressive tax structure

Answer 5

As income increases, the proportion of income paid in taxes will decrease. In other words, the tax rate decreases as income increases. The lower income feels the tax burden more than the higher income. To reduce this tax, many govt exempt basic necessities such as food from sales tax eg. tobacco, alcohol and sales tax. (look at graph)

Question 6

Reasons for taxation(1)

Answer 6

Redistribution of income:
Under a progressive tax structure, the govt can tax the wealthy people at a higher rate than the low income earners. The tax revenue collected from the wealthy can be redistributed to the poor eg. welfare assistance

Question 7

Stabilization

Answer 7

Taxes can be used as a tool to stabilize the economy.** In times of recession, the govt will lower taxes. Having to pay lower income tax means that the people will have more income to spend and in turn generate a higher national income. With a reduction in corporation tax, firms will be able to use the money previously paid in taxes on investment projects which will enable the production of more g/s**

Question 8

Discouraging the consumption of demerit goods

Answer 8

Demerit goods like cigarettes and alcohol are heavily taxed in all countries. Those taxes are applied discourage the consumption of harmful goods that result in negative externalities

Question 9

Discouraging the consumption of imported goods

Answer 9

By imposing custom duties or tariffs (taxation imports goods), the govt increases the prices of goods. This will discourage the consumption of imported goods, as more consumers will have to switch to locally produced substitues.