taxation Flashcards
recall the different types of taxes?
proportional
progressive
regressive
what is a proportional tax and what effect could it have?
- has a fixed rate for all tax payers regardless of income
- aka flat tax
- incidence of tax, regardless of the ability of the taxpayer to pay
- could encourage people to earn higher incomes as the rate of tax paid doesnt inc
what is a progressive tax and what effect could this have?
- has an increase in the average tax rate as incomes inc
- as income inc, proportion taxed inc
- e.g tax in UK is progressive
- this should help reduce inequality as those on lower incomes pay less tax
- tax is based on payers ability to ay
- higher incomes are more able to pay higher rates of tax
- direct taxes generally are more progressive
what is a regressive tax and what effect could this have?
- doesnt relate to income
- those on lowest incomes have a higher average rate of tax
- proportion of income paid as tax is higher for those on lower incomes than those on higher incomes
- this leads to less equal distribution of income
- indirect taxes are generally more regressive
recall the economic effects of a change in direct and indirect tax rates on other variables?
incentive to work and tax revenue
income redistribution
real output and employment
the price level
the trade balance
FDI flows
draw the laffer curve
what does the laffer curve show about the incentive to work?
- laffer curve shows how much tax revenue the govt receive at each level of tax
- up until point T, as tax rate inc, govt tax revenue inc
- after point T, the incentive to work falls as people dont think its as worthwhile working which leads to a falling tax revenue
- T is the optimum tax rate where the got can maximise their revenue
- Laffer argued that tax rates are too high as they provide a disincentive to work
- Laffer also argued that tax rates should be reduced to encourage people to work harder
how can a change in tax cause income redistribution and what kind of taxes has the UK switched to over the last few decades
- gov intervention could lead to income redistribution and wage equality
- e.g inheritance tax→ rich families cant keep their entire wealth
- the UK has switched towards indirect taxes over the last few decades
- the benefits favour the richest households
- this has worsened the income distribution
how can expansionary fiscal policy affect AD and show this on a diagram
- expansionary fiscal policy aims to inc AD
- govt increase pending or reduce tax rate
- this leads to a worsening govt budget deficit
- may mean that they have to borrow to finance this
how can deflationary fiscal policy (increase tax) affect AD- show this on a diagram?
- deflationary fiscal policy→ aims to dec AD
- govt cuts spending or raises taxes
- reduced consumer spending
- leads to improvement of the govt budget
how does changes in tax affect price level?
- indirect taxes cause cost push inflation
- they could also inc the costs of goods if the producer chooses to push the costs onto the consumer
- if demand for a good is inelastic → producers are likely to pass the cost of tax onto consumers
how does changes in tax affect the trade balance
- taxes could be imposed on imports into a country
- tariffs
- makes it more expensive to import which should improve the trade balance
how can you evaluate the effect of changes in tax on the balance of trade
- however other countries may retaliate so exports may fall as well
- competitiveness may decrease as lower D would reduce businesses’ need to invest
how does changes in tax affect FDI flows?
- govt can provide a competitive tax environment to encourage FDI so the market is profitable, fair and have macroeconomic stability
- taxes should be consistent and predictable so they’re business friendly
- this would encourage FDI flows
- high taxes are likely to discourage FDI flows as investors would choose to invest elsewhere
how can you evaluate the affect of changes in tax on FDI flows
- however countries may have to continue to lower their taxes in order to make them the lowest to encourage investment
- result in the fall in revenues for all countries
