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what did liz truss attempt to cut
income tax 20% to 19%
corporation tax
what is income tax
part of fiscal policy
can also be a supply side policy when used to encourage entrepreneurs to create and expand businesses effectively allowing entrepreneurs higher abnormal profits for successful innovations
impact on tax revenue would be positive (higher taxable incomes)
laffer curve
tax revenue on y axis
tax rate % on x axis
what does the laffer curve assume
nobody would work at a tax rate of 100% and more obviously when the rate is 0% then no tax revenue is generated
laffer curve explained
optimal tax rate is when the curve peaks (followed down)
any rate above a disincentive to increase individual earnings begins
advocates assume that the current rate is higher than the optimum
income or corporation tax rates can be reduced and the government will actually receive higher tax receipts because it is argued that lower rates of tax create a greater incentive to work, thus higher employment outweighs the lower tax yield per person
what is the laffer curve often used as an argument for
tax cuts
3 problems with the laffer curve
evidence
complementary taxes / costs
social benefits
evidence explanation
based off of the american system , not the uk
corporation tax went from 26% down to 20% in the uk from 2011 to 2015 but there was still no overall change in investment
complementary taxes / costs explanation
still other taxes you have to pay e.g. NI so full effect of tax change might not be felt
changing one tax still might not give incentive to invest
social benefits explanation
income / wealth inequality
if you lower the tax for the rich, then the gap between the rich and poor will widen