Role of State Flashcards
(15 cards)
Define capital expenditure
When the government spends money on assets which have a long-term reward.
Define current expenditure
When the government spends money on recurring costs.
Define transfer payment
When the government spends without receiving any goods or services in return.
List the factors in changing the amount of public expenditure
- Changes in average incomes (taxes to gov)
- Changing age distribution (how much the gov spends on benefits, healthcare)
- State of the economy (recession or boom)
- External factors (war in Ukraine, weather)
Explain what resource crowding out is
When the government increases its demand for resources, which
reduces the resources available to the private sector.
Explain what financial crowding out is
when increased government borrowing increases demand for money, thereby raising interest rates.
How does high government spending affect
productivity and growth
Increases productivity through investment -> AD -> GDP grow
But
Lack of profit motive + bureaucracy-> little incentive to increase efficiency -> limit productivity growth
How does high government spending affect
living standards + equality
Increases equality and living standards if gov spends on benefits + healthcare -> higher income -> higher disposable income -> higher living standards
But
Government may spend on military spending -> would not improve equality and living standards
Whats the distinction between progressive, proportional and regressive tax?
Progressive: Tax rate increases as income increases
Regressive: Tax rate decreases as income increases
Proportional: Tax rate remain equal as income increases
What is a direct tax
Tax directly levied on someone’s income, wealth or profit.
What is an indirect tax
Tax levied on expenditures of goods and services.
What is a specific tax
A fixed amount of tax per unit sold
What is an ad valorem tax
A percentage tax on the selling price of goods and services sold
What are the pros and cons of a progressive tax?
Pros:
1. Decreases inequality through distribution of income through taxes
- Increases spending power for low-income households
Cons:
1. Disincentivises high earners (capital flght/braindrain?)
- Fiscal drag may occur from inflation
Change in tax rates on
Incentive to work
tax revenue
Income distribution
Real output and employment
Rate of inflation
FDI
Balance of trade
Incentive to work (worsens)
tax revenue (depends on Laffer curve)
Income distribution (depends on type of tax system)
Real output and employment (worsens)
Rate of inflation (depends on SRAS and AD impact)
FDI (unattractive)
Balance of trade (improves)
