Fiscal Policy Flashcards
Direct tax
Taxes on individuals or companies that cannot be passed onto another taxpayer
Income tax
Cooperation tax
Pros of direct taxation
Anti inflationary
Reduce income inequality
Increase certainty
Cons of direct taxation
Laffer curve- direct meaning consumers more aware
High rates may hinder investment and econ growth
Indirect taxes
A tax levied on goods and services before they get to the customer which they pay
Import taxes
VAT
alcohol tax
Pros of indirect taxation
Applicable to everyone- increase govt revenue also consistent
Taxpayers don’t fee burden
Indirect tax
Can be regressive as higher proportion of income is eaten into for lower income households- increase income inequality
Can encourage tax evasion
Inflation due to higher prices
Crowding out from expansionary fiscal policy
If govt increases spending this means increasing tax to compensate which can see private sector being crowded out
Budget surplus
When tax receipts are higher than govt spending
Budget deficit
When govt spending is higher than tax receipts
Marginal tax rate
Rate in which an extra dollar would be taxed
Change in tax payable / change in taxable income
Automatic fiscal stabilisers
Fiscal mechanisms built into an economy by the government
E.g unemployment increasing increases expenditure on welfare benefits
Structural budget deficit
Tax revenues fall and spending on unemployment benefits increase
Current and capital spending
Capital is investment spending on increasing fixed assets e.g infrastructure
Current is expenditure on day to day running costs like wages of public sector
Types of fiscal policy
Expansionary - boost growth , reduce unemployment , redistribute income and increase demand pull inflation
Contractionary- reduce inflation, reduce budget deficit, redistribute income
Fiscal policy (E)
Demand pull inflation
Current account deficit
Time lags
Crowding out
