Economics · Oct / Nov 2016 · Paper 22 · Question 7

Define ‘a progressive tax’. [2]

A tax that takes a higher proportion as income rises (2). A tax that falls more heavily on the rich (1).

Explain the difference between direct and indirect taxes. [4]

Direct taxes are taxes on income (1)

the burden of the tax cannot be passed on/they are paid directly to the government by those on whom the taxes are levied/example of a direct tax (1). Indirect taxes are taxes on spending (1)

the burden or some of the burden can be passed on to others/example of an indirect tax (1).

Analyse how a fall in unemployment can increase tax revenue. [6]

A fall in unemployment will increase income (1)

more people working and people earning higher wages (1)

this will increase income tax revenue (1). Spending will increase (1)

more products will be purchased (1)

which will increase indirect taxes (1)

example (1). Higher spending will increase firms’ revenue (1)

this may increase firms’ profits (1)

which will increase corporation/direct tax revenue (1).

Discuss whether a government should increase tax rates. [8]

Up to 5 marks for why it should: Higher tax rates may increase tax revenue (1)

this would enable the government to spend more on, e.g. education and health care (1). Higher tax rates may reduce demand (1)

this could lower demand-pull inflation (1). Higher tariffs could reduce imports (1)

improve the current account position (1)

demand for imports may also fall when income tax rates are raised (1). Higher tax rates on, e.g. cigarettes and alcohol (1)

could improve people’s health (1). Higher taxes on products that create external costs/demerit goods (1)

may result in a better allocation of resources (1). Higher taxes on monopolies (1)

may encourage competition. (1). Up to 5 marks for why it should not: Higher direct taxes may act as a disincentive to work (1)

reducing employment (1). Higher direct taxes may act as a disincentive to enterprise (1)

reducing output (1). Higher taxes may encourage tax evasion (1)

and this may cause tax revenue to fall (1). Higher corporation/indirect tax rates increase firms’ costs of production (1)

causing cost-push inflation (1). Higher tax rates may reduce total demand (1)

causing unemployment (1). Higher income tax rates may cause workers to press for wage rises (1)

this may increase labour costs (1)

or may provoke industrial action (1)

which can disrupt production (1).