4.5.2

Question 1

Progressive tax

Answer 1

• Higher tax rates as income increases
• Income tax system - tax brackets

Question 2

Proportional tax

Answer 2

• Constant rate to all income levels - pay same percentage of income in taxes regardless of income
• Flat-rate

Question 3

Regressive taxes

Answer 3

• Impose higher tax burden on lower-income individuals - everyone pays the same
• Proportion of income paid falls as income rises
• Tax rate decreases as income increases
• Sales/consumption tax

Question 4

The economic effects of changes in direct and indirect tax rates on: incentives to work

Answer 4

• High marginal rates - discourage working
• Free market argue supply of labour is elastic
• Encourage migration - lower tax countries
• Taxes on poor - poverty trap
• BUT higher tax - longer hours worked to maintain income - increased incentive to work

Question 5

The economic effects of changes in direct and indirect tax rates on: tax revenues

Answer 5

• Laffer curve
• Tax revenue will initially rise as tax rate increases
• Comes to a point when revenue is maximised - hard to find exact point
• increased incentive for tax evasion/avoidance
• Revenue from indirect taxes can be uncertain as it depends on consumer spending patterns

Question 6

The economic effects of changes in direct and indirect tax rates on: Income distribution

Answer 6

• Progressive tax - increase income equality
• Regressive - decrease income equality
• Inheritance tax - very progressive
• Tax system needs to be supported with benefits

Question 7

The economic effects of changes in direct and indirect tax rates on: real output and employment

Answer 7

• Direct taxes - reduce AD from fall in consumption and investment (less profits)
• More potential gov spending
• Indirect taxes - reduced SRAS
• Income tax - reduce incentive to work - LRAS reduce - skilled workers leave - people become more inactive
• Depends on where economy is producing

Question 8

The economic effects of changes in direct and indirect tax rates on: price level

Answer 8

• Impact LRAS, SRAS, AD
• Depends on where economy is producing
• Indirect tax - cost-push inflation

Question 9

The economic effects of changes in direct and indirect tax rates on: trade balance

Answer 9

• Decrease consumption - decrease spending on imports - imports income elastic - trade balance will improve in SR
• In LR, lower AD reduces business investment and competitiveness - reduced exports - worse trade balance

Question 10

The economic effects of changes in direct and indirect tax rates on: FDI flows

Answer 10

• Low taxes - encourage investment into country - higher level of return
• Could be a race to the bottom - continue having to lower taxes to encourage investment so eventual fall in revenue