Fiscal Policy 2

Question 1

Effect of a lower corporation tax on profits

Answer 1

• increased investment
• injection into the circular flow model
• multiplier effect on demand, output and employment

Question 2

Evaluation on the effects of a cut in the tax on business profits

Answer 2

• depends on scale of tax cut
• other factors affect capital investment
• time lags

Question 3

Impact of government spending on potential output in the long-run

Answer 3

• infrastructure spending
• increased funding for unis
• business start up investment

Question 4

When does tax competition occur

Answer 4

When a national government uses reforms to the tax system as a supply-side strategy to attract investments and jobs into their economy

Question 5

Case for lower taxes

Answer 5

• work incentives
• more jobs
• FDI
• enterprise and business start-ups
• inflow of migrants
• increased tax revenues

Question 6

Case for higher taxes

Answer 6

• distribution of income and wealth
• don’t always = revenues from tax cuts
• taxes are needed to fund public services

Question 7

What does the Latter Curve concept infer

Answer 7

That a tax rate cut could lead to an increase in tax revenue, or a decrease in tax revenue, depending on whether you have already passed the ‘optimal tax rate’.

Question 8

Why might total tax revenues fall if the tax rate increases

Answer 8

• increased rates of tax avoidance
• greater incentive to evade taxes (illegal)
• possible disincentive effects in the labour market
• possible ‘brain drain’ effects

Question 9

What is the basic idea behind the Laffer Curve

Answer 9

Set an optimal tax rate to maximise tax revenues

Question 10

Evaluation point on the laffer curve

Answer 10

• increase income equality

- tax cuts may cause them to take more leisure time instead of work