Economics · May / June 2016 · Paper 21 · Question 2
2281
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The question as text
Burundi is a country in Sub-Saharan Africa. In 2013 the government of Burundi introduced VAT, an indirect tax, while lowering corporation tax (the tax on firms’ profits), from 35% to 30%. The United Nations has encouraged Sub-Saharan African countries to increase their tax revenue in order to have more funds available to spend on reducing poverty. There is, however, a debate about whether imposing more taxes or removing some taxes is more beneficial for an economy.
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2(a)[2]
Define ‘an indirect tax’. [2]
A tax on spending / goods and services / consumption (1)
the burden of the tax can be moved on to someone else (1)
example (1)
2(b)[4]
Explain how a cut in the rate of corporation tax could result in an increase in tax revenue. [4]
A lower tax will increase the profit firms can keep / lower the cost of production (1)encourage them to increase output (1)
increasing employment (1)
pay higher wages (1)
direct tax revenue would rise (1).
Spending / consumption may increase (1)more revenue from indirect taxes (1).
2(c)[6]
Using a demand and supply diagram, analyse the effect of removing an indirect tax on the market for the product. [6]
Up to 4 marks for the diagram:
axes correctly labelled – price and quantity or P and Q (1)demand and supply curves correctly labelled (1)supply curve shifted to the right (1)correct equilibriums identified either by a line drawn to both axes or equilibrium points clearly identified e.g. E and E1 (1). Up to 2 marks for written comments:removing an indirect tax effectively reduces costs of production (1)A greater supply will lower price (1). D D S S1 S1 S P Q Q1 P1 O price quantity2(d)[8]
Discuss whether an increase in taxes will reduce inflation. [8]
Up to 5 marks for why it might:
Increases in income tax (1)will reduce disposable income (1)
spending may fall (1)
lower demand will reduce demand-pull inflation (1).
Increases in corporation tax (1)reduces profits firms can keep (1)
reduces demand for capital goods/investment (1).
Increases in indirect taxes (1)will reduce spending (1)
lowering demand-pull inflation (1)
Up to 5 marks for why it might not:
Consumers and firms may respond by reducing saving (1)rather than spending (1).
Higher indirect taxes and corporation tax (1)increase costs of production / higher prices (1)
may cause cost-push inflation (1).
Higher income tax may encourage workers to press for wage rises (1)increasing costs of production (1)
causing cost-push inflation (1).
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