Taxation

Question 1

Progressive tax

Answer 1

An individuals tax rises as their income rises, income tax, increases equality

Question 2

Regressive tax

Answer 2

Tax falls as income rises, VAT is a fixed rate so those with higher income pay less of a proportion of their income on tax.

Question 3

Proportional tax

Answer 3

Proportion of income spent on tax will always remain the same so the amount differs depending on income, sales tax

Question 4

Vertical equity

Answer 4

Those on higher incomes should pay more tax

Question 5

Horizontal equity

Answer 5

People who have similar incomes should pay similar tax

Question 6

Purpose of tax

Answer 6

Redistribute wealth promoting equality

Question 7

Impact of tax changes on incentives to work

Answer 7

• supply of labour is elastic so a reduction in the marginal tax rate will increase the incentive for people to work and work harder
• poverty trap
• May cause high income individuals to move abroad
• no hard evidence for the inverse relation, nordic countries have high tax and high growth

Question 8

Impact of changing tax rate on tax revenue

Answer 8

Rise in tax rate doesn’t necessarily cause rise in revenue because if tax rate surpasses the optimal level then tax will be so high there is no point in working and more people will tax evade

Question 9

Laffer curve y and x axis

Answer 9

y axis - revenue
x axis - tax rate

Question 10

Impact of tax changes on income distribution

Answer 10

• progressive tax creates more equal income distribution, so a move from indirect to direct tax systems helps income distribution equality
• High corp taxes are very progressive
  —> However progressive tax systems need to be supported by good benefit systems to be effective

Question 11

Impact of tax changes on real output and employment

Answer 11

-rise in direct taxes reduces level of disposable income which reduces spending and AD falls
- this causes a fall in business profits so a fall in output which may also increase unemployment
- higher indirect taxes increase costs for firms which decreases SRAS
- higher income tax causes distinctive to work so people will leave the country which reduces LRAS

Question 12

How can tax changes impact price level

Answer 12

-Increases in indirect taxes like VAT can cause cost push inflation
- reduction in indirect taxes like income can cause demand pull inflation

Question 13

How can tax changes impact the balance of payments

Answer 13

• rise in tax decreases income and spending so imports may improve in the short run
  –> But In the long run falls in AD mean that businesses would have invested less so their int competitiveness would have fallen so exports fall

Question 14

How can tax changes impact FDI flows

Answer 14

• Low taxes on profit and investment (corp tax), encourage businesses to invest in a country
  —> can use a race to the bottom where countries compete to have the lowest tax rate which causes huge falls In revenue