Unit 2 - government finance

Question 1

describe different sources of government income

Answer 1

income generated by public corporations – such as through social housing

interest payments on its assets - such as student loans

Question 2

describe the difference between direct and indirect taxation

Answer 2

Direct tax is paid directly by the taxpayer to the government and cannot be shifted, like federal income tax. these are progressive in nature (EFFECTS THOSE ON HIGHER INCOMES)

Indirect tax, such as business property taxes, can be passed on or shifted to others. indirect taxes are regressive
(EFFECTS THOSE ON LOW INCOME)

Question 3

give examples of indirect taxes

Answer 3

VAT
excise duties (alcohol, drugs, tobacco)

Question 4

give examples of direct taxes

Answer 4

income tax
insurance tax
inheritance tax

Question 5

Describe income tax

Answer 5

this is a DIRECT tax and where a percentage of an individuals income is deducted as revenue for the Government. The tax rate a person pays is dependent on their income.

Question 6

Describe inheritance tax

Answer 6

this is a direct tax that is levied on property and money acquired by gift or inheritance when they die.

Question 7

describe corporation tax

Answer 7

this is a direct tax that is a tax on profits and capital gains made by companies, calculated before dividends are paid.

Question 8

describe national insurance

Answer 8

this is a direct tax levied on employment income (either employed or self-employed) It funds a range of benefits including pensions

Question 9

describe VAT (value added tax)

Answer 9

this is an indirect tax. it is levied on purchases and spending. some items are exempt from tax e.g. children’s clothes. the current rate is 20% although there are lower rates for certain items e.g. 5% on electricity.

Question 10

what does levied mean

Answer 10

impose (a tax, fee, or fine).

Question 11

describe excise duties

Answer 11

this is an indirect tax on petrol, alcohol and tobacco. used to discourage consumption.

Question 12

explain the change in burden from changing from direct to indirect taxes

Answer 12

in 1950s-60s the burden of taxation between indirect + direct taxation was steady
in 1970s burden shifted to greater direct taxation
in 1980s burden went to indirect
moreover VAT has risen 20% over the last 20 years further shifting the burden away from direct taxation.
Therefore, since the 1980s the burden of taxation has shifted from direct to indirect.

Question 13

explain how recent changes in direct and indirect taxes affect individuals

Answer 13

For individuals, this means that there has been a shift from progressive to regressive taxation. This can cause greater inequality.

Question 14

explain how recent changes in direct and indirect taxes affect firms

Answer 14

The introduction of an indirect tax increases the firm’s costs of production. For businesses, this represents an increase in costs of production.

Question 15

explain how recent changes in direct and indirect taxes affect the government

Answer 15

For governments, this means that they now will get an increase in revenue from expenditure taxation than income tax.

Question 16

explain progressive taxation

Answer 16

those on higher incomes pay proportionately more in taxes than those on low incomes

Question 17

give an example of progressive taxation

Answer 17

if you earn £100k and pay £30k tax per year. you pay 30% of your income in tax, if you earn £20k per year, you may pay £2k tax which is 10% of your income.

Question 18

explain regressive tax

Answer 18

those on lower incomes pay proportionately more in tax than those on high incomes

Question 19

give examples of main areas of government expenditure

Answer 19

health
housing
environmental protection
education
social protection
defence

Question 20

describe public goods

Answer 20

The government provides certain goods and services as private enterprise would not. e.g. street lights, beaches, parks and defence are public goods.They are provided because they benefit everyone in society.

Question 21

what 3 characteristics to public goods have

Answer 21

Non-excludable: cannot stop an individual from benefiting from defence or street lights .

Non-rivalrous: If one person consumes street lighting or visits a park, it does not prevent another from doing so.

Non- rejectable: You cannot decide not to consume street lighting or defence.

Question 22

describe merit goods

Answer 22

Merit goods are goods or services that are considered to be beneficial to individuals and society as a whole, but are often under-consumed in a free market economy.

Question 23

give an example of a merit good

Answer 23

education
healthcare

Question 24

explain reasons for government expenditure in the main spending areas

Question 25

what is current expenditure

Answer 25

This is money spent on the day-to-day running costs of government organisations, e.g. NHS, on consumable items.. e.g. teacher wages, nurses wages, medicines for hospitals, bandages for the NHS.

Question 26

what is capital expenditure

Answer 26

money spent on long-term projects that will provide future benefits such as building new schools, new hospitals and new roads. This spending helps create productive capacity and long term spending on non-current assets.

Question 27

what is transfer payments

Answer 27

This money the government gives to another without an exchange of goods and services. There’s no productive output for this transaction. eg Universal Credit and state pensions.

Question 28

give examples of current expenditure

Answer 28

healthcare
education
interest payments

Question 29

give examples of capital expenditure

Answer 29

purchases of property
equipment
land

Question 30

give examples of transfer payments

Answer 30

social security payments
welfare payments
unemployment insurance benefits

Question 31

explain the impact of government taxation on the UK economy

Answer 31

If the government reduces income tax, consumers’ disposable income will rise, leading to more spending. an increase in VAT will increase the price of goods and discourage spending. In most cases, businesses will try to pass the tax increases to the consumer.

Question 32

describe trends in UK Government spending

Answer 32

The trend of the past 70 years is steady increase in share of national income devoted to government spending on health and a corresponding decrease in the share of national income devoted to defence.

Question 33

explain the impact of UK Government spending and changing levels of spending on the UK economy

Answer 33

Inflation: Significant increases in government spending, if not matched by revenue increases or other fiscal measures, can potentially lead to inflationary pressures

Question 34

describe the circular flow of income in a closed economy (without injections and withdrawals)

Answer 34

money moves from producers to workers as wages and then back from workers to producers as workers spend money on products and services.