Taxation

Question 1

Types of taxes

Answer 1

Proportional - constant taxes that dont change with income
Progressive - % of tax paid increases with income
Regressive - % of tax paid decrease with income
Direct Taxes - tax on income
Indirect Taxes - tax on expenditure

Question 2

Impacts of Tax on incentives to work

Answer 2

Direct - reduces incentive to earn more and work (it is progressive)
Indirect - increases incentive as they want to fund the basket of goods.

Question 3

Impacts of Tax on Income Distribution

Answer 3

Direct - lower inequality
Indirect - increase inequality

Question 4

Impacts of Tax on Real Output and Employment

Answer 4

Withdrawal from circular flow
High direct taxes reduce consumption and investment, AD shifts left
High indirect tax will inflate business costs, LRAS shifts left.

Question 5

Impacts of Tax on Trade Balance

Answer 5

High direct taxes, less imports as less incomes.
High direct taxes, less exports as our products lose competitiveness

Question 6

Impacts of Tax on FDI Flows

Answer 6

Lower tax rates will incentivise more FDI as lower costs

Question 7

Laffer Curve

Answer 7

Tax rates increasing will increase tax revenue, up until a certain point. After this, tax revenue will fall as people are discouraged from employment and enterprise.