Edexcel A Level Economics A:复习笔记4.5.2 Taxation

Progressive, Proportional & Regressive Taxes

  • Tax systems can be classified as progressive, proportional or regressive
  • Most countries have a mix of progressive (direct taxation) & regressive (indirect taxation) taxes in place

 

  1. Progressive tax system: as income rises, a larger percentage of income is paid in tax (e.g. UK Income Tax; UK Corporation Tax). This system is built around the idea of marginal tax rates

    UK Progressive Tax Rates - June 2022

    Tax Band Taxable Income Tax Rate
     

    Personal Allowance

     

    Up to £12,500

     

    0%

     

    Basic Rate

     

    £12,501 to £50,000

     

    20%

     

    Higher Rate

     

    £50,001 to £150,000

     

    40%

     

    Additional Rate

     

    Over £150,000

     

    45%

    Using this system, a salary of £60,000 would attract a tax bill of £11,499.80, calculated as follows:
    First £12,500 - no tax
    Next £37, 499 at 20% = £7499.80
    Final £10,001 at 40% = £4,000

  2. Regressive tax system: as income rises, a smaller percentage of income is paid in tax (e.g. excise duties on alcohol & petrol in the UK; VAT; Air passenger duty). Regressive taxes can have a big impact on low-income households. In 2020 they represented 30% of income for the poorest 20% of households - but only 10% of income for the top 20% of households
  3. Proportional tax system: the percentage of income paid in tax is constant, no matter what the level of income e.g 10% tax is paid irrespective of whether income is £10,000 or £100,000. Bolivia uses this system & the tax rate is 13%

The Economic Effects of Changes in Tax Rates

  • Changes in direct & indirect tax rates influence a range of economic variables
    • The greater the size of the change, the greater the ripple effects through the economy

 

Effects Of Tax Rate Changes

Impact Explanation
 

Incentive to work

 

  • The higher the tax rate, the lower the incentive for the unemployed to seek work - or for existing workers to work overtime
  • In 2022, the Adam Smith Institute calculated that average earners in the UK work from the 1st January to the 8th June (Freedom Day) to pay their taxes - all income after that point belongs to them
 

Tax revenues

 

  • The Laffer curve illustrates the relationship between increasing tax rates & the level of government revenues received
  • The broad idea is that as tax rates increase, a point will be reached where disincentivized workers work less resulting in less income & less government tax revenue. More people will actively seek to avoid paying tax (tax avoidance) or try to move their income elsewhere

4-5-2-laffer-curve

The Laffer Curve demonstrates the relationship between tax revenue & tax rates

 

  • Tax rate increases up to point A, will result in an increase of tax revenue.  Further tax rate increases from A to B result in a loss of tax revenue from C to D
 

Income distribution

 

  • A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality
  • Sometimes the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes
 

Real output & employment

 

  • If the tax rate increases, more money is withdrawn from the circular flow of income (leakage)
  • This will likely cause a reduction of aggregate demand (AD) as firms & households have less disposable income
  • As AD slows down, fewer workers may be required for production & unemployment may increase
 

Average price level

 

  • An increase in indirect taxes reduces disposable income & so workers may petition their employer for a salary increase
  • If they receive the increase the economy may face a wage-price spiral
  • Indirect taxes also increase costs of production for firms possibly leading to cost-push inflation
 

The trade balance (X-M)

 

  • An increase in taxes can reduce disposable income which is likely to reduce the level of imports
  • This may improve the trade balance (exports - imports)
 

Flows of Foreign Direct Investment (FDI)

 

  • If the rate of corporation tax increases relative to other countries, it may result in less inward foreign direct investment

 

 

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