Taxation

Question 1

What are the ways of implementing tax?

Answer 1

progressive tax
regressive tax
proportional tax

Question 2

What is progressive tax?

Answer 2

the proportion of income, profit or price you pay in tax increases as your income, profit or price increases

Question 3

What is regressive tax?

Answer 3

the proportion of income, profit or price you pay in tax decreases as your income, profit or price increases

Question 4

What is proportional tax?

Answer 4

the proportion of income, profit or price you pay in tax stays the same as your income, profit or price increases

Question 5

What 7 important areas to changes in tax affect?

Answer 5

incentives to work
tax revenue
income distribution
output and employment
price level
trade balance
FDI flows

Question 6

Incentives to work

Answer 6

increase direct tax or decrease indirect tax reduces the incentive to work

Question 7

Laffer Curve

Answer 7

y-axis = tax revenue
x-axis = tax rate %
shape is n - due to the incentive to work

Question 8

Tax revenue

Answer 8

will begin to decrease up to a point due to the incentive to work (laffer curve)

Question 9

Income distribution

Answer 9

decrease in direct taxes / increase in indirect taxes increase income inequality

Question 10

Output and employment

Answer 10

if increase in AD, derived demand and output increases (increase real GDP)

Question 11

Price level

Answer 11

if AD is affected (e.g higher disposable incomes = more consumption) then price level will be too

Question 12

Trade balance

Answer 12

decrease income tax - higher disposable incomes - more imports - worsened trade balance
(VAT does not affect imports however, only tariffs)

Question 13

FDI flows

Answer 13

decrease income tax - increase FDI (as rich managers/CEOs keep more income)
increase VAT - decrease FDI (higher prices = less profit)