4.5.2 taxation

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10 Terms

1
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progressive taxes

  • Progressive taxes r characterised by higher tax rates as income increases. In other words, individuals with higher incomes pay a higher % of their income in taxes.

2
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proportional (flat) taxes

  • Proportional taxes apply a constant tax rate to all income lvls. This means that individuals pay the same % of their income in taxes, regardless of their income.

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regressive taxes

  • Regressive taxes impose a higher tax burden on lower-income individuals compared to higher-income individuals. This occurs because the tax rate decreases as income increases.

4
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the econ effects of changes in tax rates on various variables: incentives to work

  • High tax rates on income may reduce the incentive to work more/engage in productive activities, esp at higher income lvls.

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the econ effects of changes in tax rates on various variables: tax revenues (the laffer curve)

  • The Laffer Curve illustrates the r/s between tax rates + tax revenues. Initially, as tax rates rise, tax revenues increase. However, at some point, higher tax rates can discourage econ activity, leading to a decrease in tax revenues.

  • Finding the revenue-maximizing tax rate is a complex challenge for policymakers.

<ul><li><p>The Laffer Curve illustrates the r/s between tax rates + tax revenues. Initially, as tax rates rise, tax revenues increase. However, at some point, higher tax rates can discourage econ activity, leading to a decrease in tax revenues.</p></li><li><p>Finding the revenue-maximizing tax rate is a complex challenge for policymakers.</p></li></ul><p></p>
6
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the econ effects of changes in tax rates on various variables: income distribution

  • Taxation can be used as a tool to redistribute income. Progressive tax systems can help reduce income inequality by imposing higher tax rates on high-income individuals.

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the econ effects of changes in tax rates on various variables: real output + employment

  • Lower taxes on businesses + Is may stimulate EG + job creation.

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the econ effects of changes in tax rates on various variables: price lvl

  • Indirect taxes, eg. sales taxes, can influence the price lvl by increasing the cost of g/s. This can lead to higher consumer prices.

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the econ effects of changes in tax rates on various variables: the trade balance

  • Changes in taxes, esp on Ms + Xs, can affect a country's trade balance. Higher M taxes (tariffs) can reduce Ms but may also lead to retaliation by trading partners.

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the econ effects of changes in tax rates on various variables: FDI flows

  • Countries with favourable tax environments for businesses + investors may attract more FDI.