Taxation Flashcards
What is Progressive Taxation
As income rises - a larger percentage of income is paid
Income Tax in the UK is progressive
What is proportional taxation
The percentage of income paid in tax is constant - no matter what the level of income
What is regressive taxation
As income rises - a smaller percentage of income is paid in tax
VAT
What is Direct Tax
Tax levied on income, wealth and profit
What is Indirect Tax
Tax levied on spending
Can indirect tax be passed on by producers
Yes depending on PED and PES
Can direct tax be passed on
No
What is the Laffer Curve
Supposed relationship between economic activity and the rate of taxation which suggests there is an optimum tax rate which maximises total tax revenue
Why might total tax revenue fall if the tax rate increases
Increased rates of tax voidance
Increased rates of tax evasion
Brain drain effects
Disincentive effects in the labour market
Evaluation of the Laffer Curve
Lower top rate taxes might increase income inequality
Little evidence that high top rates of income is a barrier to inward migration of skilled labour
Many people are on fixed hours / zero hour contracts - tax rates have little impact on work incentives
Less motivation to work if income tax falls
Effect of Taxation and Aggregate Demand
Changes in tax rates and tax allowance have direct and indirect effects on the level of AD
Changes in income tax and national insurance have a direct effect on people’s disposable incomes
Changes in corporation tax affect the post-tax profit available for businesses to invest
Changes in employer’s national insurance affect the cost of employing extra workers in the labour market
A change in VAT brings about changes in retail prices and affects the real incomes of consumers
Taxation and Aggregate Supply
Changes in tax rates and allowances have a direct and indirect effect on SRAS and LRAS
Changes in VAT affect business costs
Changes in direct taxes can influence work incentives
Changes in business taxes might affect the level of FDI into a country
Taxes can affect the incentive to start a business or to spend money on research and development
