4.5.2 Taxation

Question 1

4.5.2a
Progressive Tax

Answer 1

As income increases
Tax increases

E.g Tax bands

Question 2

4.5.2a
Proportional Tax

Answer 2

Tax rate is constant as income increases

E.g Flat rate on income tax

Question 3

4.5.2a
Regressive Tax

Answer 3

As income rises
Tax decreases

E.g VAT

Question 4

4.5.2b
Changes of tax on : Incentive to work

Answer 4

Tax rate ↑ → disposable income ↓ → Incentive to work ↓ → benefits from JSA / unemployment benefits ↑ relatively → ↓ incentive to work → Labour supply ↓

Question 5

4.5.2b
Changes of tax on : Tax revenue

Answer 5

Tax rate ↑ (from low level) → Tax revenue ↑
Tax rate ↑ (beyond optimal) → Incentives to work ↓ + Tax evasion ↑ → Tax revenue ↓

Question 6

4.5.2b
Changes of tax on : Income Distribution

Answer 6

Progressive tax rate ↑ → Higher earners pay more tax → Income redistribution ↑ → Income inequality ↓
Regressive tax rate ↑ → Lower-income pay higher proportion → Income inequality ↑

Question 7

4.5.2b
Changes of tax on : Real Output and employment

Answer 7

Direct tax ↑ → Disposable income ↓ → Consumption ↓ → Aggregate demand ↓ → Real output ↓ + Employment ↓
Indirect tax ↑ → Production costs ↑ → Aggregate supply ↓ → Price level ↑ (cost-push inflation) + Real output ↓

Question 8

4.5.2b
Changes of tax on : Price Level

Answer 8

Indirect tax ↑ → Costs ↑ → Prices ↑ (cost-push inflation)
Direct tax ↑ → Disposable income ↓ → Demand-pull inflation ↓ → Price level ↓

Question 9

4.5.2b
Changes of tax on : Trade Balance

Answer 9

Tax ↑ → Disposable income ↓ → Import consumption ↓ → Trade balance improves (short term)
Corporation tax ↓ → Investment ↑ → Productivity ↑ → Exports ↑ → Trade balance improves (long term)

Question 10

4.5.2b
Changes of tax on : FDI flows

Answer 10

Corporation tax ↓ → After-tax profits ↑ → FDI inflows ↑ → Investment ↑ → Employment ↑ → Economic growth ↑ → Tax revenue ↑
Tax competition ↑ → Tax rates ↓ → Government revenue ↓ → Public spending ↓ → Potential long-term growth ↓