5. Fiscal And Supply-side Policies

Question 1

What is fiscal policy?

Answer 1

Making deliberate changes in either government spending or taxation

Question 2

How is government spending financed?

Answer 2

Tax revenue

Question 3

What is direct tax?

Answer 3

A tax that cannot be passed don to another person and is usually levied on incomes

Question 4

What is indirect tax?

Answer 4

Tax on spending

Question 5

What is progressive taxation?

Answer 5

Those on higher incomes pay higher proportions of their income in tax, compared with lower incomes

Question 6

What is the tax-free allowance?

Answer 6

£12,570

Question 7

What is the basic rate?

Answer 7

20% £12,570 to £50,270

Question 8

What is the higher rate?

Answer 8

40% £50,271 to £125140

Question 9

What is the additional rate?

Answer 9

45% over £125,140, plus loses personal allowance

Question 10

Why is the income tax system progressive?

Answer 10

Tax is paid only on the additional income earned

Question 11

What are regressive taxes?

Answer 11

Taxes that increase in relative size to lower income earners

Question 12

What are proportional taxes?

Answer 12

Taxes that are paid in equal proportion by everyone (flat taxes)

Question 13

What are the main taxes used in the UK?

Answer 13

• Income tax
• National insurance
• Corporation tax
• Inheritance tax
• Capital gains tax
• VAT

Question 14

What is income tax?

Answer 14

• Main direct tax
• Paid on earnings from employment

Question 15

What is national insurance?

Answer 15

• Used to raise finance for health care and welfare expenditure
• Charged whether the worker pays into a private or occupational pension scheme
• Employers pay 15% for every employee who earns more than £96
• Employees pay 8% if they earn more than £242 a week

Question 16

What is corporation tax?

Answer 16

• Tax on the profits earned by companies
• 25% on profits over £20,000

Question 17

What is inheritance tax?

Answer 17

• 40% on anything over £325,000

Question 18

What is capital gains tax?

Answer 18

• Based on profits earned from the sale of assets (physical - houses, financial - bonds)

Question 19

What is VAT?

Answer 19

• Indirect tax of 20%

Question 20

Advantages of income tax?

Answer 20

• Seen as fair
• Progressive nature can alleviate poverty
• Calculated and administered by employers for workers

Question 21

Disadvantages of income tax?

Answer 21

• Disincentive to work
• Progressive system makes it complex
• Encourages tax avoidance/evasion

Question 22

Advantages of VAT?

Answer 22

• Doesn’t affect work incentives
• Hard to avoid

Question 23

Disadvantages of VAT?

Answer 23

• Regressive in many cases
• Changes in VAT can be inflationary

Question 24

Advantages of corporation tax?

Answer 24

• Based on each companies success

Question 25

Disadvantages of corporation tax?

Answer 25

- May deter foreign investment - Encourages tax avoidance - May discourage business investment

Question 26

Advantages of excise duties?

Answer 26

- Can change patterns of expenditure - Used to discourage consumption of demerit goods

Question 27

Disadvantages of excise duties?

Answer 27

- May lead to unemployment in those industries - Regressive in some cases - Can lead to ‘black markets’

Question 28

What are excise duties?

Answer 28

- Additional indirect taxes placed on alcohol, tobacco and fuel - Unit taxes

Question 29

Advantages of council tax?

Answer 29

- Seen as fair as based on wealth of household - Raises money for local services

Question 30

Disadvantages of council tax?

Answer 30

- Poverty values used to set ‘bands’ are very out of date - Those who are ‘asset rich, cash poor’ may find it difficult to pay

Question 31

What is council tax?

Answer 31

- Administered by the government - Based on the value of the property

Question 32

What is ‘ad valorem tax’?

Answer 32

A tax based on percentage of added value on top of the original price§

Question 33

What is unit tax?

Answer 33

A fixed amount of tax placed on an item sold

Question 34

What is a levy?

Answer 34

To impose or to place (often taxes being imposed)

Question 35

Why do governments levy taxes to raise revenue to finance government expenditure?

Answer 35

- UK spends over £800 billion per year, financed from tax revenue - Government still has to borrow money to maintain desired expenditure

Question 36

Why do governments levy taxes to change patterns of economic activity?

Answer 36

Taxes can be placed on one product to encourage a shift away from another (taxes lowered on renewable energy sources to discourage away from non-renewable)

Question 37

Why do governments levy taxes to discourage consumption and production of certain products?

Answer 37

Governement tax demerit goods (alcohol, tobacco) to discourage consumption - Alcohol and tobacco are subject to excise duties, lowering demand

Question 38

Why do governments levy taxes to redistribute income?

Answer 38

Progressive income taxes mean the gap between rich and poor households will be narrowed as more tax is taken from higher incomes

Question 39

What are hypothecated taxes?

Answer 39

Tax levied to raise money for a specific purpose

Question 40

What is horizontal equity?

Answer 40

Where people with similar income levels pay similar amount of tax

Question 41

What is vertical equity?

Answer 41

Tax paid is based on ability to pay

Question 42

What are the principles of taxation?

Answer 42

- Economical - Equitable (horizontal and vertical) - Efficient - Convenient - Certain - Flexible

Question 43

What is current expenditure?

Answer 43

Governement spending on day-to-day running of services

Question 44

What is capital expenditure?

Answer 44

Government spending on investment projects (new infrastructure)

Question 45

What are the major areas of public expenditure?

Answer 45

- Public goods provisions - Merit goods provisions - Welfare expenditure - Debt interest

Question 46

What is expansionary fiscal policy?

Answer 46

Refers to either increases in governement spending or reductions in taxation - rightward AD shift

Question 47

What is contractionary fiscal policy?

Answer 47

Tax rises and/or public spending reductions - leftward AD shift