Unit 2.3 Flashcards

Question

Vertical Equity

Answer 1

Tax burdens should be distributed in a way that is fair and reflects differences in the ability to pay. This principle is closely related to the ability-to-pay principle. Direct taxation is levied on income, wealth and profit

Answer 2

include income tax, inheritance tax, national insurance contributions, capital gains tax, and corporation tax The burden of a direct tax cannot be passed on.

Answer 3

are taxes on spending: Examples of indirect taxes include excise duties on fuel, cigarettes and alcohol. Producers may be able to pass on an indirect tax - depending on the coefficient of price elasticity of demand and supply.

Answer 4

The ability-to-pay principle suggests that individuals or entities with a greater ability to pay taxes should contribute a larger share of their income or wealth to the government in the form of taxes. This principle is closely related to the idea of tax fairness and progressive taxation.

Answer 5

The tax base in a country is the base of what is taxed and who pays a tax What is taxed? Income, Wealth (inheritance tax), Spending on goods and services, Pollution (Green taxation), Data / Financial Transactions Who is paying tax?: Households and Businesses The tax burden can be judged at a micro and a macroeconomic level

Answer 6

The microeconomic perspective also examines the incidence of taxes, which is about who ultimately bears the economic burden of a tax. For example, if a business is taxed, it may pass on some of the tax burden to consumers through higher prices, or it may reduce employee compensation or investment in the business.

Answer 7

This refers to the total amount of taxes collected by the government as a percentage of the Gross Domestic Product (GDP) or national income. It provides insights into the overall level of taxation in an economy.

Answer 8

A progressive tax is a type of tax system in which the marginal and average tax rate increases as the amount of taxable income increases. The basic idea behind progressive taxation is to tax individuals and corporations at a higher rate as their income increases, under the principle that those with higher incomes can afford to pay more in taxes. In a progressive tax system, the tax rate is typically applied in brackets, with each bracket having a higher tax rate than the previous one. For example, in the UK the income tax system is progressive, with different marginal tax rates for different levels of income.

Answer 9

A regressive tax is one where the average tax rate as a % decreases as the amount of taxable income increases, so lower-income taxpayers pay a higher percentage of their income in taxes than higher-income taxpayers. Examples of regressive taxes can include sales taxes and excise duties. In other words, a regressive tax puts a greater burden on lower-income taxpayers than higher-income taxpayers. For example, a sales tax such as VAT on groceries would affect a lower-income person more than a higher-income person, since a lower-income person spends a greater portion of their income on groceries than a higher-income person.

Answer 10

Proportional taxes, also known as a flat tax, are a type of tax system where the marginal and average tax rate remains constant or uniform regardless of an individual's or entity's income, wealth, or financial situation. In other words, everyone pays the same percentage of their income or wealth in taxes. The tax rate does not change as income or wealth increases or decreases. In a proportional tax system, the tax rate remains the same for all taxpayers. For example, if the proportional tax rate is set at 20%, every taxpayer, regardless of their income, will pay 20% of their income as taxes.

Answer 11

Occurs when a government spends more money (total expenditure) than it collects in revenue ( total income) during a specific period, typically a fiscal year. Implications- to cover the deficit, the government may need to borrow money by issuing bonds, which can lead to an increase in the overall debt level. Budget deficits can be used strategically during economic downturns to stimulate economic growth or during emergencies but should be managed carefully to avoid unsustainable levels of debt. Effects on debt- budget deficits contribute to the accommodation of government debt, which needs to be repaid in the future, often with interest. The UK has been in a deficit for the last 20 or so years.

Answer 12

Occurs when a government collects more money (total income) than it spends (total expenditure) during a specific period. Implications- a budget surplus allows a government to save or pay down debt, invest in infrastructure, or reduce taxes. Budget surpluses can be used to prepare for economic downturns, reduce the debt burden, or invest in long-term projects. Effects on debt: Budget surpluses can be used to reduce or eliminate government debt. UK public sector debt- is set to remain at around £2.5 trillion for the next 5 years, 95.5% of GDP. Interest repayments. 2024-25 Debt Interest spending totalled £105 billion, 8.2% of public expenditure.

Answer 13

Automatic stabilisers are automatic fiscal changes as an economy moves through different stages of the business cycle - such as a fall in tax revenues from the circular flow during a recession or an increase in state welfare benefits when the unemployment rate is rising.

Answer 14

-Impact depends on whether a government allows the automatic stabilisers to operate fully - and does not introduce fiscal austerity measures such as real spending cuts during a slowdown / recession -Impact depends on the relative generosity of the welfare system such as base levels of payment for universal credit and unemployment support. Some governments have capped total welfare payments. -Impact depends on the marginal propensity to spend and save of those households whose income is boosted by welfare during a recession

Answer 15

During an economic recession, real output and employment contracts. As real incomes fall, people pay less in direct and indirect taxes and company tax payments also drop And government spending on welfare support such as Universal Credit increases Combined, this will increase the budget deficit A fiscal deficit is a net injection into the circular flow - thus helping to limit the depth / severity of a recession During periods of rapid economic growth (a boom phase) Tax revenues will rise as household real incomes and corporate profits grow - unemployment is declining Government welfare spending then falls as more people are in work and require less state financial support As a result, government finances improve including a falling budget deficit / possible fiscal surplus Consequently, fiscal policy is taking income out of the circular flow - automatic stabilisers help moderate a boom

Answer 16

* Increased Borrowing: To finance a budget deficit, the government often needs to borrow money through the issuance of bonds or other debt instruments. When the government competes with private borrowers for funds in the financial markets, it can lead to higher interest rates. * Higher Interest Rates: Higher interest rates can lead to reduced private sector investment and borrowing. This is known as the "crowding out" effect, where increased government borrowing reduces the availability of funds for private sector investment, which can offset the stimulative impact of the deficit. * Expectations of Higher Taxes: A growing fiscal deficit might lead some households and businesses to expect higher taxes in the future causing them to cut back on spending and save more in anticipation. This lowers AD.

Answer 17

The crowding out effect is a theory that suggests that increased government spending ultimately decreases private sector spending. Crowding out can happen when an increase in government borrowing leads to a rise in demand for loanable funds which in turn causes market interest rates to rise. This can then squeeze or crowd-out capital investment spending by private sector businesses. It can also occur when rising government borrowing ultimately leads to a higher tax burden which cuts real disposable incomes for households and reduces post-tax profits for businesses.

Answer 18

* Fiscal Balance = Total Tax Revenue - Total Expenditure * Surplus: When the fiscal balance is positive (Total Revenue > Total Expenditure), the government is said to have a budget surplus. * Deficit: When the fiscal balance is negative (Total Revenue < Total Expenditure), the government is running a budget deficit. This indicates that the government is spending more money than it is collecting in revenue. * Balanced Budget: When the fiscal balance is zero (Total Revenue = Total Expenditure), the government has a balanced budget. In this case, the government's revenue exactly matches its spending, with no surplus or deficit.

Answer 19

* Issuing Government Bonds: Governments issue bonds, such as treasury bonds c government securities, to raise funds. These bonds are sold to investors, includir individuals, financial institutions, and foreign governments. * International Borrowing: Governments can also borrow from international organizations such as the International Monetary Fund (IMF) or World Bank, or through the issuance of bonds in global financial markets. * Central Bank Financing: In some cases, governments may rely on their central banks to finance budget deficits. The central bank can purchase government bonds or provide loans to the government. This approach, known as "monetizing the debt," can have implications for inflation and monetary policy, and it is typically used with caution.

Answer 20

* Accumulation Over Time: National debt is the result of a country consistently running budget deficits, where the government's expenditures exceed its revenues. When this happens, the government borrows money to cover the deficit, leading to an increase in the debt. * Purpose: Governments often use debt to finance critical infrastructure projects, public services, and other expenditures. It can also be used as an economic tool during recessions to stimulate economic growth. * Debt Servicing: Servicing the national debt involves paying interest on the outstanding debt and, when necessary, repaying the principal amount borrowed. - Debt to GDP Ratio is around 98% in UK

Answer 21

* Direct Increase in Government Spending (G): When a government runs a budget deficit, it is essentially spending more money than it collects in revenue. This often involves increasing government expenditures, which directly contributes to the "G" component of aggregate demand. * Lower taxes: A budget deficit might also be due to a reduction in either direct or indirect taxes which then causes a rise in household disposable incomes ar - in theory a higher level of aggregate demand. * Multiplier Effect: The increase in government spending can have a multiplier effect on aggregate demand. As government spending rises, it can lead to increased income for individuals and businesses, leading to higher consumption and investment (crowding in) as animal spirits rise, further boosting aggregate demand.

Answer 22

The fiscal multiplier estimates the final change in real national income (GDP) that results from an initial (exogenous) change in government spending and/or revenue plans.

Answer 23

Includes changes in the base rate of interest and or the money supply to influence the rate of growth of aggregate demand. - a fall in interest rates would mean that the AD curve would shift to the right - This is because consumers would have more disposable income due to smaller interest payments for mortgages (only for tracker(variable) rate mortgages, around 15-20% of Uk mortgage holders have these so the impact moderated) + loans etc -Also an incentive to save less, so more disposable

Answer 24

The major purpose of a rise in interest rates is to 'cool down' an economy that is overheating ie to reduce inflationary pressures due to high aggregate demand. The exact opposite applies to a fall in interest rates. A cut in interest rates is often used to aid economic recovery and boost consumer demand, make exports more competitive, and encourage capital investment by firms.

Answer 25

-It has short action and implementations -It is flexible (can change 0.1% at a time or more) -Central bank is independent - political neutrality -Works well to slow down the economy in a boom and increase economic growth in a recession as has more of an impact on disposable income.

Answer 26

-May be ineffective in a recession- firms may be reluctant to invest, even though it is cheap to borrow because they cannot see any increase in demand -Not very good in deflationary situations (falling prices, no possibility of negative interest rates): -High-interest rates may affect investment and aggregate supply -Increases in AD are likely to be inflationary -Time lags -Interest rates can only be lowered nominally to 0%, limiting the effectiveness of this tool when rates are already low. This can lead to a liquidity trap, where even with low interest rates, individuals and businesses may not be willing to borrow or invest, rendering monetary policy ineffective.

Answer 27

-Demand for goods and services is likely to alter depending on the change in interest rates -The cost of borrowing is likely to change with changes in interest rates -Company share prices may fall as interest rates rise, safer investments become avaliable. This may mean investors look elsewhere to invest and so harder to raise money via equity.

Answer 28

Quantative easing (demand-side) : -Process by which central banks print money electronically and use this to buy government bonds and other financial instruments from commercial banks and other financial institutions -This causes an increase in bond demand and thus bond prices to rise. -As bond prices and the yield on the bonds move in opposite directions, the yield will fall (i/r paid to bond holder). -Yields used as a benchmark for market interest rates, feeding through to the wider economy and encouraging investment. -Also, commercial banks use the extra cash on balance sheets to lend, encouraging consumption + investment -Commercial banks may also lower interest rates as they are receiving so much money from the Bank of England and so can offer very low interest deals to their customers. The increased money supply will mean that the price of money falls; interest rates are the price of money. This will encourage borrowing, and therefore increase investment (increasing AS thus decreasing inflationary pressures of increase in C) and consumption so increase AD. If many banks decide to lower their interest rates, the same mechanisms will apply as those following a reduction in the base rate -But deflationary situation so eval? -Finally since the bank is buying assets and financial instruments can increase asset prices creating a positive wealth effect for share owners, increasing consumption (can increase inequality and no guarantee if confidence low, also richer people who have lower MPC) -Only used when central banks struggling to stimulate growth using conventional monetary policy e.g. at a time when nominal interest rates have fallen to historically low levels.

Answer 29

Base rate reduced. Other interest rates in the economy follow suit. The cost of borrowing for consumers and businesses falls. There is a rise in consumption (C) and in investment (I). More goods and services are consumed meaning that businesses respond by increasing output. To do this, businesses are likely to take on more workers and so unemployment falls. AD has increased and the economy has grown.

Answer 30

Basic Rate is 20% between 12,571 and 50,270. Higher rate is 40% and is paid on earnings between 50,271 and 125,140. 45% is paid on all earnings above 125,140.

Answer 31

You lose £1 of your tax-free personal allowance for every £2 that your income goes over £100,000. Anyone earning over £125,140 no longer has any tax free personal allowance.

Answer 32

-Corporation tax is 25% on profits over £250,000

Answer 33

The government cut National insurance by 2p in April. The Rate of NI changed from 10% to 8% for 27 million voters from 6th April 2024. Rate will fall from 8% to 6% for 2 million self employed people. However rise in secondary NICS for employers ( those they pay on their employees earnings) from 13.5% to 15% and a lowering of the thresehold from £9,100 to £5,000 means more businesses will be required to pay NICs on lower-paid workers (part-time, students etc, rises cost of employment) , increasing costs for businesses. Secondary NIC rise comes into effect April 2025. Estimated to impact around 1.2 million employers. High Street Companies such as Lush announced price increases follwinig rise.

Answer 34

The financial crisis sparked the use of demand-side economic policy by the US government. The Obama administration lowered interest rates. It also cut taxes for the middle class. It put together a $787 billion stimulus package -UK used expansionary monetary policies with record low interest rates (cut to 0.5% and stayed low until pandemic) and quantitative easing. The Bank of England said the QE led to lower unemployment and higher growth than would otherwise have been the case.

Answer 35

Demand-side economics is another name for Keynesian economic theory. States demand for goods and services is a force behind healthy economic activity. Pushed for policies that increased government spending and decreased taxes. -During the great depression factories sat idle due to lack of demand - Increased spending and lower taxes introduced to increase consumption

Answer 36

Supply-side policies are a set of economic measures and strategies that aim to improve the long-run productive capacity and efficiency of an economy. The primary goal of supply-side policies is to stimulate long-term economic growth, increase productivity, and create a more favourable environment for businesses to operate.

Answer 37

Trend growth is the long term non-inflationary increase in GDP caused by an increase in a country’s productive capacity. The trend rate of economic growth is the average sustainable rate of economic growth over time.

Answer 38

-Improve incentives to work and invest in people’s skills (human capital) -Increase labour and capital productivity -Increase occupational and geographical mobility of labour -Increase capital investment and research and development spending -Promote contestability and stimulate innovation (dynamic efficiency) -Encourage start-ups and expansion of new businesses especially those with significant export potential / promote economic diversification -Improve price & non-price competitiveness in global markets -Improve the trend rate of sustainable growth of real GDP to help support improved living standards & better regional economic balance

Answer 39

- Low R&D spending - 1.74% of GDP in 2019, lower than in comparable countries like the US (3.1%) and Germany (3.2%). -Low Investment - Business investment fell to just 10% of GDP in 2020. Overall, UK investment is lower than OECD average. -Skills Shortages- 1.3 million job vacancies. Reported that by 2024 there will be a shortfall of four million highly skilled workers -Economic inactivity - 400,000 rise in economic inactivity since 2020. Inactivity now 20% of the population of working age -Low Labour mobility- Low housing affordability (to buy and rent) and structural barriers to social mobility. In 2021, only 6,000 new social housing units supplied in UK. -Ageing Infrastructure - 5 million homes at risk of flooding. Major rise in serious pollution incidents from water/sewerage. Inadequate transport network -Regional economic imbalances- GDP per head (2019, £) London: £56,199 Northeast: £24,068 UK: £33,151 -Productivity Gap - In 2019, ranked on GDP per hour worked, the UK came fourth highest out of the G7 countries. UK productivity 15% below the US & France

Answer 40

-Privatisation – Royal Mail in 2016 (Channel 4 has been proposed) -Deregulation of the UK retail energy market -Creation of new 8 Free Ports and Regional Enterprise Zones **-Tax free childcare: Up to £500 every 3 months (up to £2,000 a year) for each child**,** also If your child's aged between 9 months and four if both parents working you can get up to 30 hours of Government-funded childcare a week.** **-Creating 20 Institutes of Technology, roll-out of T Levels, new National Skills Fund** -Unemployment: Kickstart scheme for long term unemployed, Apprenticeship Levy on Firms -Reforms to the UK immigration system (moving to a points-based system) **-Fom 2019, the investment tax free allowance has permanently increased five fold from £200,000 to £l million meaning that businesses who invest in plant and capital machinery are able to claim back up to £1m from its taxable profits incentivising businesses to bring forward investment plans thus boosting the capital stock in the economy.** -**Since 2010, corporation tax rates have fallen from 28% in 2010 to 19% In 2022 encouraging investment. However this has risen to 25% 2023 but is partially offset by a full capital expensing policy ** -Major infrastructure projects (+ creating the new UK Infrastructure Bank) -Lower Thames Crossing, London Super-Sewer -Funding for rollout of electric vehicle charging infrastructure -UK Gigabit Programme and the Shared Rural Network. -Relaxation of planning for renewables (off-shore wind) / UK Emissions Trading Scheme

Answer 41

-Tax cuts -Cutting red tape -Privatisation and liberilisation -Free trade and capital mobility across borders -Flexible labour markets -Deregulation of markets

Answer 42

-Tax Cuts: Lowering income, corporate, and capital gains taxes can provide individuals and businesses with more disposable income and greater after-tax profits, thereby incentivizing work, investment, and entrepreneurial activities. -Deregulation: Reducing government regulations and bureaucratic red tape can lower compliance costs and make it easier for firms to operate, expand, and innovate. It can lead more firms to enter markets to make them more contestable / competitive. -Trade Liberalisation: Reducing trade barriers, such as tariffs and quotas, can stimulate international trade and stimulate investment in exports -Intellectual Property Protection: Strong intellectual property rights protection encourages innovation and entrepreneurship by ensuring that creators and inventors can profit from their ideas and inventions.

Answer 43

-These policies emphasize minimal government intervention and regulation while promoting individual initiative, entrepreneurship, and competition -Tax Cuts: Lowering tax rates, especially on businesses and high-income earners, is a fundamental aspect of free-market-based supply-side policies. -Deregulation of markets: Reducing bureaucratic hurdles is another core element. -Labour Market Flexibility: Advocates often support labour market reforms that reduce restrictions on hiring and firing -Privatization: Transferring state-owned assets and services to the private sector is a way to inject market competition and efficiency -Trade Liberalization: Reducing trade barriers, such as tariffs and quotas can enhance the competitiveness of domestic industries.

Answer 44

-Competition Policy: Authorities can break up monopolies or prevent mergers that might create dominant market players. -Deregulation: Removing unnecessary regulations can lower barriers to entry for new competitors and make it easier for smaller firms to enter markets dominated by large corporations. This can stimulate competition and innovation. -Market Access: Policies that facilitate access to markets including licensing reforms and reduced market entry costs, can enhance competition. -Open Data and Interoperability Standards: Mandating open data and interoperability standards can encourage competition by enabling different companies to build products or services that can seamlessly work together, promoting innovation.

Answer 45

-Labour Market Deregulation: Reducing regulations and restrictions on the labour market can make it easier for employers to hire and fire workers, adjust wages based on productivity, and adapt to changing economic conditions. -Reducing Trade Union Power: Policies that limit the influence of unions or make it easier for workers to opt out of union membership can lead to more flexible labor negotiations and potentially lower labour costs for employers. -Immigration Reforms: Creating a more flexible immigration system that attracts high-skilled workers can help increase a country's productive capacity. Fill skill gaps. -Gender and Diversity Inclusion: Encouraging gender and diversity inclusion in the labor force can expand the talent pool and improve competitiveness by harnessing a broader range of skills and perspectives.

Answer 46

-Many industries and occupations in the UK are highly dependent on net inflows of workers from overseas – they include: -Agriculture -Hospitality and tourism -Health and social care -Construction -Transport and logistics -Labour market dynamics can change over time due to factors like changes in immigration policies and global events (e.g., Brexit, the COVID-19 pandemic).

Answer 47

-Income Inequality: Tax cuts that primarily benefit high-income earners and reductions in social safety nets can lead to a wider wealth gap, as those at the top benefit disproportionately. -Reduced Social Safety Nets: Critics argue that these policies can lead to reduced public services, including healthcare, education, and welfare programmes. Weaker social safety nets can leave vulnerable populations without essential support. -Underinvestment in Public Goods: There may be underinvestment in critical public goods like infrastructure, healthcare, and education, which are essential for long-term economic growth. -Market Failures: Free markets are not perfect and can lead to market failures, such as externalities (costs or benefits imposed on third parties) and public goods problems (goods with non-excludable and non-rivalrous consumption). -Financial Instability: Deregulation and lack of oversight in financial markets can contribute to financial instability. Critics argue that this was evident in the 2008 financial crisis, which many attribute, at least in part, to excessive risk-taking and lax regulation in the financial sector.

Answer 48

-State investment in key public services and infrastructure including transport, energy and housing -A commitment to a minimum wage to improve work incentives & productivity -Higher taxes on the wealthy to fund public and merit goods -An active regional policy to inject extra demand into areas of persistently high unemployment / lower per capita income -Selective import controls to allow domestic industries to expand -Management of the exchange rate to improve export competitiveness -Nationalisation of and tougher regulation of key industries / utilities

Answer 49

-Bureaucracy and Inefficiency: Critics argue that government intervention can lead to bureaucratic inefficiencies, which may slow down economic processes and result in the misallocation of resources. -Crowding Out Private Sector: Interventions, particularly those involving public ownership or control of industries, may crowd out private investment and entrepreneurship. -Reduced Incentives: Critics claim that high taxation and extensive regulation can reduce individuals' and businesses' incentives to work, invest, and innovate. -Ineffective Redistribution: High levels of taxation can lead to capital flight and tax evasion, undermining the intended redistribution. -Costly and Inefficient State Enterprises: State-owned enterprises can become inefficient and financially burdensome, as they may not operate with the same degree of cost-efficiency and innovation as private companies.

Answer 50

-Increasing GDP is likely to come with inflationary pressures, particularly with positive output gaps and when AD is growing faster than AS. -Solution - increase AS

Answer 51

-When the economy is growing consumers have higher levels of spending. UK has high MPM ( imports) which would widen the current account deficit. -Opposite would be true for export led growth such as Bangladesh, China and Germany.

Answer 52

-To reduce a budget deficit, could increase tax and/ or lower government expenditure but this would lead to lower AD - this conflicting with economic growth.

Answer 53

-Increased growth is likely to come with negative externalities such as pollution and use of non-renewable resources, particularly from manufacturing.

Answer 54

-Low unemployment rates can result in inflationary pressures. This can be explained by the Phillips Curve.

Answer 55

As Unemployment decreases, inflation rises due to increased wage costs. -Shows trade off between inflation and unemployment. -As employment increases shortages in labour could cause an increase in wage levels. -If economy is growing and employment increasing- suppliers would raise prices to increase profit. On a long run aggregate supply curve: If demand shifts on flat part - GDP output has increased but no inflation, lots of unemployment, labour cheap. Firms dont need to increase prices as wages low. If on rising part: The economy nearing full capacity, low unemployment, so people demand higher wages which will increase costs and therefore inflation

Answer 56

Cutting corporation tax can stimulate investment, create jobs, increase overall tax by attracting MNCs -However effect depends on size and scale of tax cuts, time lags between change in corporation tax and increase flow of actual investment, new investment may lead to loss of jobs through capital-labour substitution. -Apple chose Jersey, which has a zero percent corporate tax rate for foreign companies

Answer 57

1. Liquidity Trap: Low Interest Rates and High Savings: During a deflationary period, interest rates are often very low, sometimes even near zero. In a liquidity trap, people and businesses prefer to hold onto cash rather than invest or spend it, even with low interest rates. This is because they anticipate further price declines, making them more cautious. Limited Effect of Lowering Rates: Further reductions in interest rates may not be able to stimulate demand, as businesses and consumers are already holding onto cash and are not willing to borrow or spend, even with lower interest rates. 2. Impact on Real Interest Rates: Deflation Increases Real Interest Rates: When there is deflation, the real interest rate (nominal interest rate adjusted for inflation) effectively rises, even if the nominal interest rate is low or zero. This is because the value of the money you repay increases over time. Disincentive for Borrowing and Spending: Higher real interest rates make borrowing more expensive and can discourage spending, consumption, and investment, potentially leading to a self-reinforcing cycle of deflation and economic decline. In Japan i/r are officially -0.1% to fight deflation, however low confidence offset lower borrowing cost, has began to improve in recent year though. (neg i/r only applied to commercial bank deposits, incentivisng them to not keep excess reserves and lend out to boost AD) 3. Debt Deflation: Increased Debt Burden: Deflation also increases the real value of debt, meaning that the burden of debt payments increases for individuals and businesses. This can lead to reduced spending and investment, further contributing to deflation

Unit 2.3 Flashcards

(81 cards)