Income Tax

Question 1

Explain what happens when there is a lower income tax rate ?

Answer 1

Increase disposable income for the rich, meaning more consumption, meaning an increase in AD and overall leading the multiplier effect.

Question 2

Name an evaluation point for a lower income tax rate!

Answer 2

Reduces government revenue from taxes meaning that they have less to spend on healthcare, schools etc.. This will reduce government spending and reduce AD.

Question 3

Increasing income tax is an example of what policy

Answer 3

Contractional fiscal policy. Because fiscal policy means changing gov spending on taxes and gov spending . Contractional means contracting AD by increasing taxes and decreasing government spending.

Question 4

Name an advantage of increasing income tax for high earners.

Answer 4

• decreases their disposable incomes -> decreasing consumption && AD -> helps bring the price level down and control inflation.
• it will also increase income tax revenue which will help government balance its budget.

Question 5

Name a disadvantage of increasing income tax

Answer 5

• reduction in AD will reduce real GDP.
• You will see the rich wont want to earn high amounts or even stoop working to avoid being taxed so much, this can lead to downward multiplier effect and overall decreasing income tax revenue.

Question 6

Explain the chain that occurs when there is a decrease in consumption

Answer 6

less consumption -> firms fewer sales -> less investment -> less VAT, corporation tax -> decrease gov spending -> firms less income -> meaning they fire more people ->reducing GDP!!