A regressive tax does not relate to income, but means those on lowest incomes have a higher average rate of tax. In other words, the proportion of income paid as tax is higher for those on lower incomes than those on higher incomes. For example, as a percentage of income, the London Congestion Charge and Council Taxes are higher for those on lower incomes. This leads to a less equitable distribution of income. Generally, indirect taxes are more regressive.

What is a fiscal policy?

Fiscal policy involves the manipulation of government spending, taxation and the budget balance.

What is an expansionary fiscal policy?

This aims to increase AD. The government does this through increasing spending and decreasing taxes. This leads to the government budget deficit worsening, and it may mean that the government have to borrow more to finance this.

What is a deflationary fiscal policy?

This aims to decrease AD. The government cuts spending and increases taxation therefore reducing consumer spending. This leads to improvement of the government budget deficit.

How can fiscal policy be used to influence AS?

The government could reduce income and corporation tax to encourage spending and investment. The government could subsidise training or spend more on education. This lowers costs for firms, since they will have to train fewer workers. Spending more on healthcare helps improve the quality of the labour force, and contributes towards higher productivity.

What is government budget deficit?

A government has a budget deficit when expenditure exceeds tax receipts in a financial year.

What is government budget surplus?

A government has a budget surplus when tax receipts exceed expenditure.

What is the difference between government deficit and debt?

The debt is the accumulation of the government deficit over time. It is the amount the government owes. The deficit (or surplus) is the difference between expenditure and revenue at any one point.

What are direct taxes?

Direct taxes are imposed on income and are paid directly to the government from the tax payer.

What are indirect taxes?

Indirect taxes are imposed on expenditure on goods and services, and they increase production costs for producers. This increases market price and demand contracts.

What are ad valorem taxes?

Ad valorem taxes are percentages, such as VAT, which adds 20% of the unit price. This is the main indirect tax in the UK.

What is specific tax?

Specific taxes are a set tax per unit.

What is a proportional tax?

A proportional tax has a fixed rate for all tax payers, regardless of income.The incidence of taxes is equal, regardless of the ability of the taxpayer to pay. It could encourage people to earn higher incomes, because the rate of tax paid does not increase.

What is progressive tax?

A progressive tax has an increase in the average rate of tax as income increases. As income increases, the proportion of income taxed increases. This should help reduce inequality. Generally, direct taxes are more progressive.

What is regressive tax?

A regressive tax does not relate to income, but means those on lowest incomes have a higher average rate of tax. In other words, the proportion of income paid as tax is higher for those on lower incomes than those on higher incomes. For example, as a percentage of income, the London Congestion Charge and Council Taxes are higher for those on lower incomes. This leads to a less equitable distribution of income. Generally, indirect taxes are more regressive.