Changes in Tax Rates Flashcards
What are the 3 categories of taxation?
1) Progressive taxations.
2) Proportional taxation.
3) Regressive taxation.
What is progressive taxation (give example)?
As income rises, a larger percentage of income is paid in tax. E.g. the UK income tax system.
What is proportional taxation?
The percentage of income paid in tax is constant, no matter the level of income.
What is regressive taxation (give example)?
As income rises, a smaller percentage of income is paid in tax. E.g. excise duties (in the UK) on tobacco, alcohol, and petrol.
What are the ‘canons of taxation’ (the 4 features of ‘good’ tax) suggested by Adam Smith
1) The cost of collection must be low, relative to the yield.
2) The timing should be certain and clear.
3) The means of collection should be convenient for the taxpayer.
4) Taxes should be levied based on the taxpayer’s ability to pay.
What are marginal tax rates?
The rate of tax on an additional £1 of income.
What is the effect of high tax rates on the supply-side of the economy (3)?
1) High corporation tax can lead to less incentives for firms to invest.
2) High rates of income tax can reduce incentives to work extra hours, preferring to substitute leisure time.
3) High indirect taxes will raise production costs, either causing firms to lower their output or raise their prices.
What are 3 negative implications of high tax rates?
1) Increased economic disincentives (to work, to invest, etc.)
2) An increase in tax avoidance/evasion.
3) A rise in the number of tax exiles (individuals who choose to leave the country to avoid paying tax).
Explain the Laffer curve (5).
1) The Y-axis represents tax revenue for the government.
2) The X-axis represents the tax rate %.
3) The Laffer curve is an upside-down U shape.
4) The Laffer curve shows that as tax rates are increased to a given point, tax revenue rises.
5) The Laffer curve shows that after a certain point, an increase in the tax rate causes a fall in tax revenue.
When did VAT last rise in the UK, what did it rise from, and what did it rise to?
In 2011, VAT rose from 17.5% to 20% in the UK.
Why do some regard VAT as a regressive tax?
Because the poorest 10% of households pay almost 20% of their net household income as VAT, whereas the richest 10% only pay less than 10% of their net income.
What is income distribution?
How total income is divided within a population. Progressive taxation will tend to lead to a more equal income redistribution.
Explain the effect of a rise in taxation on output and employment.
An increase in taxation will lead to a fall in AD, as taxes are a leakage from the circular flow of income. This may reduce real output and can cause an increase in unemployment.
Explain the effect of a fall in taxation on output and employment in the long-run.
Lower direct taxes can lead to higher incentives, resulting in increased investment by firms and increased participation in the labour market. This can increase LRAS, in turn causing economic growth, potentially boosting employment.
Explain the effect of a rise in indirect taxation on the price level.
An increase in indirect taxation can be inflationary if it causes a wage-price spiral. E.g. an increase indirect taxation causes a rise in prices, leading to an increase in wage demands for workers. This causes firms’ costs to rise, further increasing prices.
