Theme 4: Taxation Flashcards
What are the 2 kinds of tax?
Indirect and direct
- *Indirect-** paid by the firm when the consumer purchases the product
- *Direct-** directly to government
What are the 2 types of indirect taxes?
- *Specific taxes:** fixed amount on each unit sold
- *Ad valorem:** a percentage of the price of the good
What is a progressive tax and what is an example?
Proportion of income, profit or price increases as increases. eg income tax
What is regressive tax? and give an example
Proportion of income, profit or price will increase as decreases. Eg national insurance 12% to 2% once you earn £46,000
What is proportional tax? and give an example
Proportion of income, profit or price you pay in tax will stay the same as your income profit or price increases. eg corporation tax and ad valorem
How do changes in tax impact incentives to work?
Increase direct = decrease incentive to work
Decrease VAT = decrease incentive as can afford tax revenue.
How does a change in tax level impact tax revenue?
As tax rate increases up to a certain point when people may decide its not worth working for anymore.
How does change in taxation impact income distribution?
Reduce income tax leads to increased inequality.
VAT has a regressive effects as pay higher portion of their income on tax.
How does changes in taxation impact output and employment?
Increased aggregate demand effects.
- Increased derived demand for labour leads to higher employment
- Increase in real GDP leads to higher output
How can changes in taxation impact price level?
Lowering income tax rates means that disposable income will increase. So aggregate demand may increase which will increase price level.
If taxation increases consumption will decrease leading to AD decreasing and price level will decrease.
How does a change in direct taxation impact a trade balance
Worsen as people have more disposable income to spend on goods.
How does a change in indirect taxation impact the trade balance?
Improve if increase tariffs but no impact on VAT
How does changes in taxation increase FDI flows?
The lower income tax rate meant that FDI flows into the UK increased. This is because the UK became a more attractive place to invest as managers knew they would be able to keep more of their income.
How does changes in taxation decrease FDI flows?
Increasing indirect taxes will mean that goods and services become more expensive which might mean that consumers buy less and so firms make less profit. This is likely to put investors off and so FDI will decrease.
