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