economics : theme 4 - laffer curve

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10 Terms

1
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what did liz truss attempt to cut

income tax 20% to 19%

corporation tax

2
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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)

3
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laffer curve

  • tax revenue on y axis

  • tax rate % on x axis

4
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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

5
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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

6
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what is the laffer curve often used as an argument for

tax cuts

7
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3 problems with the laffer curve

  • evidence

  • complementary taxes / costs

  • social benefits

8
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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

9
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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

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social benefits explanation

  • income / wealth inequality

  • if you lower the tax for the rich, then the gap between the rich and poor will widen