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Fiscal Policy (Potential problems with national debt (High interest…

- - - - If there is 'normal' economic growth (i.e. real GDP is above 1%), there must be a budget surplus.
- - - - National debt rises
        
        Opportunity cost of government spending
  - - - National debt falls
- - - - Army logistics
      - Drugs used in health care
      - Road maintenance
      - Salaries of NHS staff
  - - - New equipment in the NHS
      - Flood defence schemes
      - Construction of new motorways and buildings
      - Extra defence equipment
      - IMPORTANT: This is the 'G' part of AD!
- - - - Indirect taxes - on spending
        
        Excise duties, e.g. alcohol, fuel etc
        
        VAT
        
        Flat rate and regressive
        
        Children's clothes, postal services and educational books are exempt. Also, companies with turnover below the VAT threshold.
        
        Indirect taxes can target demerit goods
      - Direct taxes - on income, wealth and profit
        
        Income tax
        
        Progressive tax, i.e. the rate of tax increases as income increases
        
        Income tax rates 2017/18
        
        Higher rate: over £150,000 £11,501 to £45,000 has a marginal tax rate of 45%
        
        Tax free allowance: £11,500
        
        Higher rate: £45,001 to £150,000 £11,501 to £45,000 has a marginal tax rate of 40%
        
        Basic rate: £11,501 to £45,000 has a marginal tax rate of 20%
        
        Corporate tax
        
        Inheritance tax
        
        NI contributions
        
        With a proportional tax, the marginal rate of tax is constant leading to a constant average rate of tax
        
        Easy to collect
- - - - Increased rates of tax avoidance – greater incentive to seek out tax relief, make max use of tax allowances
      - Greater incentive to evade taxes (illegal) – i.e. non–declaration of income and wealth
      - Possible disincentive effects in the labour market – depending on which taxes have been increased
      - Possible “brain drain” effects – loss of highly skilled, high income taxpayers
  - - - Supporters of the Laffer Curve are often those pushing for lower tax rates on higher income earners
      - Lower top rate taxes might increase income inequality
      - Little strong evidence that top rate income tax is a major barrier to inward migration of skilled labour
      - Many people are on fixed hours / zero hours contracts – so tax rates have little bearing on work incentives
      - Tax rates not the only factor affecting work incentives – we must also consider the impact of the benefits system
      - For some people, tax cuts will cause them to take more leisure time instead of work – a backward bending labour supply curve effect – especially at higher wages/ earnings
      - There is a solid Keynesian explanation for some aspects of the Laffer Curve – cuts in direct and indirect taxes increase real disposable income and therefore lead to higher consumer spending and aggregate demand