Unit 2 - 5

Question 1

What are the reasons for cuts in public spending?

Answer 1

1. Resources can be released for use by private sector - many believe the private sector uses the resources more efficiently
2. Income tax can be reduced, more incentive to work harder and consumers have more disposable income
3. The government can reduce borrowing

Question 2

What are the reasons against cuts in public spending?

Answer 2

1. Resources released by the public sector are sometimes not taken up by the public sector and they me remain unemployed
2. Lower incomes groups are most dependant on public spending
3. Capital spending is easiest to cut back on but reduces the country’s infrastructure

Question 3

Why is there taxation?

Answer 3

1. To raise money for public spending
2. To discourage consumption
3. To reduce differences in incomes
4. To achieve macroeconomic objects
5. To help protect the environment

Question 4

What is direct taxation?

Answer 4

1. Tax on income and wealth
2. Taken from individuals and firms
3. Progressive
4. Eg. Income tax and corporation tax

Question 5

What is indirect tax?

Answer 5

1. Tax on expenditure
2. Tax payer passes on burden of the tax usually to the customer
3. Regressive
4. Eg. VAT

Question 6

What is meant by progressive tax?

Answer 6

1. Takes a larger percentage of income as income rises
2. Benefits low income earners
3. Most direct taxes

Question 7

What is meant by regressive tax?

Answer 7

1. Lower income earners pay higher percentage of their income in tax
2. Same % for everybody
3. Most indirect taxes

Question 8

What makes a good tax?

Answer 8

1. EQUITY - should relate to taxpayers ability to pay
2. EFFICIENT - should be inexpensive to collect, no side effects such as reduced incentive to work
3. CERTAINTY - tax payer should be aware of how much is due, and when and where to pay
4. CONVENIENCE - should be payable at a time and place that suits the tax payer

Question 9

What are the effects of increasing direct tax?

Answer 9

1. Less disposable income
2. Less incentive to work harder or longer which means decreased efficiency
3. Unemployed people will be discouraged to seek work

Question 10

What are the effects of increasing indirect tax?

Answer 10

1. Decrease in real incomes

2. People may change their spending patterns

Question 11

What are the reasons for cuts in income tax?

Answer 11

1. Tax revenue will rise as people will be more likely to pay taxes and not avoid
2. Incentives to work harder will increase and unemployed encourage to work as they get to keep more of their money

Question 12

What are the reasons against cuts in income tax?

Answer 12

1. Tax revenues may not increase as people will choose to spend more time leisure as they are better off
2. The demand side of the economy maybe over stimulated resulting in inflation
3. Inequalities likely to widen as income tax is progressive, as cuts favour those who are better off

Question 13

What are environment problems that may cause market failure?

Answer 13

1. Global warming
2. Air pollution
3. Water pollution
4. Noise
5. Traffic congestion
6. Landfill waste
7. Deletion of non-renewable energy resources

Question 14

What is market failure?

Answer 14

Occurs when a market fails to supply the type or quantity of goods and services demanded by consumers

Question 15

What are the public spending trends?

Answer 15

1. Increased under labour government, conservative announced cuts
2. Increased spending on health and education