Economics 5.2 Taxation
Tax
A payment/finance to the government/local authority
progressive tax
A tax graduated so that people with higher incomes pay larger fraction of their income than people with lower incomes.
Sales tax (with example)
A tax on spending. Eg VAT
property tax
A tax on the value of a property
regressive tax
A tax whereby people with lower incomes pay a higher fraction of their income than people with higher incomes.
VAT
Alternative to sales tax. Added in each stage of production on the value added (cheese, factory and farm)
Discuss whether an increase in taxes will cause deflation
An increase in income tax will reduce disposable income, reducing tax payers' purchasing power, which may reduce consumer expenditure, eventually reducing total demand which may cause deflation. With higher tax revenue eg higher income tax revenue, the government may spend more, leaving total demand unchanged.
Bonds
Borrowing done by buying and issuing bonds
Explain two reasons why tax revenue may fall
Consumption may fall, reducing indirect tax; unemployment may increase reducing income tax revenue
Advantages of direct tax
Cost effective, flexible, can target specific comsumption
Difference between direct and indirect taxes (4)
Direct taxes are on income, burden of tax cannot be passed on. Indirect taxes are on spending, the burden or some of the burden can be passed on.
Good tax
Equality; certainty; convenience; simplicity
How a fall in unemployment can increase tax revenue (6)
Fall in unemployment will increase income, more people working and people earning higher wages, will increase income tax revenue. Spending will increase, more products purchased, increase in indirect tax revenue.
Advantages of direct taxes
High revenue yield (as is progressive); can reduce income and wealth inequalities (takes more from rich); based on ability to pay (people rarely struggle to pay)
Discuss whether a government should increase tax rates
Higher tax rates may increase tax revenue, and would enable government to spend more on eg health care. Higher tax rates on things like cigarettes and alcohol could improve people health. But may act as disincentive to work, reducing employment. May also reduce total demand, causing unemployment.
Explain two reasons why an increase in unemployment may reduce tax revenue
Higher unemployment will reduce amount people spend, which will reduce indirect tax revenue; higher unemployment will reduce people's incomes, which will reduce amount of income tax paid
Discuss whether a cut in corporation tax will increase economic growth
If firms increase their output, will directly increase real GDP and will also lead to higher employment, which will increase total demand, further increasing output. Firms may be making a loss and so will not benefit from the cut or may be pessimistic about the future and may not expect to make a profit in the future.
Effect on imposing tax on fizzy drinks
Indirect tax is cost to firms, decrease in supply will raise price of fizzy drinks
Disadvantages of indirect tax
Inflationary; encourages tax evasion; revenues are less predictable
sales tax
Levied on sales to the final consumer (cheese shop)
Whether an increase of sales tax would benefit an economy
May provide more government tax revenue, enabling the government to spend more, eg may raise educational standards. But likely to fall more heavily on the poor and increase income inequality as well as reducing spending and output and increasing unemployment.
Implicit liabilty
Money promised by government to pay out in future that doesn't currently have. Caused by low productive gains, ageing problems
Why taxes?
Raise revenue; reduce inequalities in income; reduce consumption of harmful goods; reduce harmful production
Disadvantages of direct taxes
Reduces initiative to work, save or start business (may harm economy and growth); encourages tax evasion
Indirect taxes
Seller is responsible for paying the tax (leads to an increase in the price of the good)
decrease in supply
Shift left, increase in price
decrease in demand
Shift left, price decreases
budget deficit
Spending > budget
Analyse how a rise in tax rates may influence poverty (6)
Tax revenue may be used to help the poor, eg provide education, lower absolute poverty. A rise in regressive taxes, taking a higher portion of the income of the poor, may increase relative and absolute poverty.
How government can raise revenue
Taxation; fees, rent, etc; borrowing
Business Taxes
Taxes on firms' profits.
national debt
The sum of government deficits over time
inheritance tax
This is a tax one would pay on their parents or grandparents' money after they die
Tax base
Value of what's being taxed
import tariff
a tax levied by a nation on goods imported into the country
capital gains tax
a tax levied on profit from the sale of property or of an investment.
Sin taxes
a tax on items considered undesirable or harmful, such as alcohol or tobacco.
gift tax
a tax on money or property that one living person gives to another
ad valorem tax
an indirect tax where a percentage is added to the selling price of each unit. (Eg sales tax of 20% of price)
external debt
government debt owed to individuals in foreign countries
internal debt
government debt owed to other governmental agencies or to its own citizens
fees
monies charged for a service
direct tax
paid directly to the government
Proportional tax
tax rate remains the same regardless of the amount on which the tax is imposed
payroll tax
taxes paid by the employer on behalf of their employees
marginal tax rate
the extra taxes paid on an additional dollar of income