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4.5.2 TAXATION, image, image, image, image, image, image, image - Coggle…
4.5.2 TAXATION
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TYPES OF TAXATION
Progressive: % of income taxed increases as income increases, eg income tax.
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IMPACTS OF TAX CHANGES
Incentives to work
Increase in taxes discourage workers as free market economists argue the supply of labour is elastic
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HOWEVER, Nordic countries have high tax rates yet good growth.
Also a higher tax rate means people have to work longer to maintain income.
TAX REVENUE
Laffer curve shows that increasing tax rates will increase tax revenue to T star and after this point tax revenue will decrease as tax avoidance increase and incentives to work decrease
FDI FLOWS
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-However, this can cause race to the bottom which will reduce revenue.
INCOME DISTRIBUTION
-Progressive taxes are likely to increase equality
-Regressive taxes reduce equality
-Inheritance taxes and corporation taxes are the most progressive as it targets the wealthiest.
-However, a good benefits system will be needed.
TRADE BALANCE
-Increase in income tax will decrease disposable income and thus the demand for imports so trade balance will improve.
-In the long run however, this decrease in AD will reduce investment and thus decrease competitiveness of exports
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