Topic 10 -Taxation

Question 1

Direct tax

Examples of direct tax

Answer 1

Taxes or charges on income or wealth.
Paid directly to the government by the individual taxpayer . The tax liability cannot be passed onto someone else.

• income tax:Progressive tax levied at 3 rates 20,40& 45%
• inheritance tax:Proportional tax levied on inherited assets 40% estates over 320k
• corporation tax: Proportional tax levied on company profits at 17%
• Capital gains tax: A tax levied on the increase of the value of assets between the time they were bought&time sold e.g on shares&investment property

Question 2

Indirect tax

Examples of indirect tax

Answer 2

Tax or charge levied on expenditure of goods and services e.g

-VAT (Value added tax): An ad valorem tax ( a percentage of the price of a product) (20%)
-Excise duties: specific taxes or charger per unit sold
Tariffs: Charge or tax on imported goods.

Question 3

Categories of taxation

Answer 3

• Proportional tax: It is a tax where the rate of taxation is fixed (as income^ tax remains constants)
• Regressive tax: Tax rate decreases at income increases (proportion of income paid in tax falls as income rises)
• Progressive tax: proportion of income paid in tax rises as income increases

Question 4

Categories of taxation diagram

Answer 4

Tax l -Proportional tax= —
paidl -Progressive tax= /
l -Regressive Tax
l
l
l________________

Question 5

Effects of an increase in income tax

Answer 5

• Disincentive to work
• Tax revenues increase initially
• Rate of economic growth (decrease)
• Distribution of income: income distribution more equitable

Question 6

Effects of an increase in income tax:

1. ) Disincentive to work
2. ) Tax revenues increase initially

Answer 6

1. ) -Unemployed will be less willing to take jobs
   - those employed may be less willing to do overtime&more likely to reduce their hours
2. ) -Initially an increase in income tax is likely to cause an increase in government taxation
   - Once the tax is increased further tax revenues are likely to fall (laffer curve) because:
   - tax avoidance (legal) will increase
   - Tax evasion (illegal) will decrease
   - increased disincentive to work

Tax
revenue l o o o o o o
l o o
l o o
l o o
l o o
__________________
Tax rate %

Question 7

Effects of an increase in income tax:

3. ) Rate of economic growth
4. Distribution of income

Answer 7

3. ) -Disincentive to work > affect AS
   - Higher income tax> a decrease in disposable income> consumption will decrease > a decrease in AD
4. ) An increase in in income tax will make the tax system more progressive> proportionately more tax will be taken from those on higher levels of income, and redistributes welfare benefits to those on lower incomes.

Question 8

Effects of an increase in rate of VAT:

Answer 8

• Incentives to work: (incentive)
• Tax revenues (increase) unless PED=elastic
• One-off increase in inflation
• Reduction in rate of economic growth
• income distribution will be less even

Question 9

Effects of an increase in rate of VAT:

1. incentives to work
2. Tax revenues

Answer 9

1. Increased incentive to work harder because workers will try to maintain living standards (so that they can afford the g&s)
2. Tax revenues: Higher tax revenues unless goods have an elastic demand.

Question 10

Effects of an increase in rate of VAT:

3. One-off increase in inflation
4. Decrease in economic growth

Answer 10

3. One-off increase in prices.
4. Lead to a fall in real income>fall in consumption> fall in AD. For businesses higher VAT costs> fall in AS> reduction in rate of economic growth

Question 11

Effects of an increase in rate of VAT:

5. Income distribution

Answer 11

-Impact of VAT is regressive> an increase in VAT will cause income distribution to become less even e.g individual on 20k pays the same for a good as an indiviudal on 200k > greater proportion of the individual with lower income goes towards paying the tax