Theme 4.5 - The role of the State in the macroeconomy Flashcards
4.5.2 - What is progressive taxation?
where those who are on higher incomes pay a higher marginal rate of tax, they pay a higher % of their income in tax. Direct taxes tend to be progressive eg income tax
4.5.2 - What is proportional tax?
where the proportion of income paid on tax remains the same whilst the income of the taxpayer changes
4.5.2 - What is regressive tax?
where the proportion of income paid in tax falls as the income of the taxpayers rises. Most indirect taxes are regressive eg VAT
4.5.2 - What are the impacts of tax changes?
- Incentive to work
- Tax revenue
- Income distriubtion
- Real output and employment
- Price level
- Trade balance
- FDI flows
4.5.2 - How does tax changes impact the incentive to work?
higher taxes on high income earners could encourage them to move aboard
- high marginal rates of tax will discourage individuals from working
4.5.2 - How does tax changes have an impact on tax revenue?
The Laffer curve shows that a rise in tax ration does not necessarily increase tax rev
- T is the optimal tax level maximising rev on the tax rev diagram
4.5.2 - How does tax changes impact income distribution?
progressive tax systems increase equality while regressive decrease income inequality
4.5.2 - How does tax changes impact real output and employment?
rise in direct tax = decrease in disposable income = fall in AD
rise in indirect tax = increase in cost = decrease in SRAS
4.5.2 - How does tax changes impact price level?
taxes can impact LRAS, SRAS and AD = impact on price
4.5.2 - How does tax changes impact trade balance and FDI flows?
TB - rise in tax = decrease in income and C = decrease in imports
FDI - low tax on profit and investment = encourages businesses to invest
4.5.3 - What is fiscal deficit and national debt?
Fiscal deficit is when the government spends more than it receives that year
National debt is the sum of all government debts built over many years
4.5.3 - What is cyclical and structural deficit?
Cyclical - the part of the deficit that occurs due to gov spending and tax fluctuates around the trade cycle - recession= tax rev low and spending high = large deficit
Structural - fiscal deficit which occurs when the cyclical deficit is 0, long term and not related to the state of the economy
4.5.3 - What are automatic stabilisers?
Mechanisms which reduce the impact of changes in the economy on national income, government spending and taxation are auto stabilisers - cannot prevent fluctuations
4.5.3 - What is discretionary fiscal policy?
The deliberate manipulation of gov expenditure and taxes to influence the economy
4.5.3 - What is discretionary fiscal policy?
The deliberate manipulation of gov expenditure and taxes to influence the economy
4.5.3 - What factors influence the size of national debts?
- Ageing populations tend to contribute to a high national debt
- Continuously running a deficit
4.5.3 - What factors influence the size of a fiscal deficit?
- Trade cycle
- Unforeseen events
- Interest rates
- Privatisation
- Government aims
- High revenues from oil
- Number of dependents in a country
4.5.3 - What is the significance of the size of the fiscal deficit and national debt?
- High levels of borrowing may raise interest rates increasing high price of money = crowding out of the economy
- High FDs and NDs benefit today at the expense of future gens and can cause intergenerational inequality
- High FDs can cause inflation
- High levels of debt tend to result in a reduced credit rating for the government
- Gov borrowing can benefit growth if used for capital spending
4.5.4 - What macroeconomic policies can be used by governments?
can use fiscal policy, monetary policy, supply side policy, exchnage rate policy and direct control in order to achieve a number of goals
4.5.4 - What can be used to reduce fiscal deficits and national debts?
- demand stimulus by high spending - causes economic growth - higher tax rev
- Rely on automatic stabilisers to allow economy to grow
- gov default on loans but econ cost so large that can do when only option
4.5.4 - What can be done to reduce poverty and inequality?
- progressive tax system - produce more equal distribution of income after tax
- benefits and transfer payments - universal benefits (child benefits etc) or means tested benefits
- provision of goods and services
- national minimum wage or equal pay legislation or trade union friendly legislation
- improvements in access to education and training opportunities
4.5.4 - What can be done to reduce international competitiveness?
- supply side measures - improve productivity and flexibility eg tax and deregulation
- exchange rate policies
- sign trade agreements or join WTO
4.5.4 - What can be done to counter changes in interest rates and supply of money?
- fall in bank rate = increase supply of money as more demand for loans
- central banks should allow inflation caused by supply side shocks but manage demand side inflation
- QE
4.5.4 - What measure can be used to control global companies operations?
TNCs can bring huge gains but also have negative econ and social impacts
- regulation of transfer pricing - tax avoidance - in the UK companies which don’t allocate sufficient profits are challenged by HMRC and has led to billions of pounds earnt in taxes
- Ability to control global companies - difficult for individual governments to control TNCs
4.5.4 - What are the problems facing policy makers?
- Inaccurate info - short term info eg GDP often inaccurate so gov unable to see problems
- Risks and uncertainties - cannot accurately predict future so difficult to know whether extra spending necessary
- external shocks - gov unable to control and prep for external shocks - best can hope for lessened impacts
