Government aims

• Macroeconomic aims of government

  • Economic growth
  • Full employment or low unemployment
  • Stable prices or low inflation
  • Balance of payments stability
  • Redistribution of income and wealth
• Economic growth


  Increase in a country's real gross domestic product (GDP) over time
• Economic growth


  • Represents a long-term expansion in the productive capacity of the economy
  • Can be shown by an outward shift of the production possibility curve (PPC)

  
• Negative economic growth


  Results in a recession in the business cycle
• Unemployment


  Occurs when people are willing and able to work, and actively seeking employment, but are unable to find work
• Unemployment rate


  Percentage of the labour force that is unemployed
• Inflation


  Sustained rise in the general price level in an economy
• Consumer Price Index (CPI)


  Weighted index that measures the change in prices of a representative basket of goods and services consumed by the average household in the economy
• Balance of payments


  Financial record of a country's transactions with the rest of the world for a given time period, usually one year
• In theory, the balance of payments must always balance over time because a country, like an individual, can only spend what it earns
• Large and persistent balance of payments deficit

  Suggests the country is uncompetitive in international markets, which can have detrimental consequences for the domestic economy
• Redistribution of income


  Governments aim to achieve greater equality through the redistribution of income
• Economies face unequitable distribution of income due to the naturally unequal ownership of factors of production in a free market economy
• Progressive taxation


  Charges a higher percentage tax as an individual's income rises

  
• Regressive taxation


  Those with a higher ability to pay are actually charged a lower rate of tax

  
• Proportional taxation


  The percentage paid stays the same, irrespective of the taxpayer's level of income, wealth or profits

  
• Principles of taxation


  • Equitable (fair)
  • Economical
  • Convenience
  • Certainty
  • Efficiency
  • Flexibility
• Imposition of a sales tax


  Shifts the supply curve of a product to the left due to the higher costs of production, increasing the price charged to consumers and reducing the quantity produced and sold
• Taxation tends to reduce economic growth
• Taxpayer


  Should know what, when, where and how to pay the tax (to limit tax evasion)
• Efficiency


  • The tax system should attempt to achieve its aims without any undesirable side-effects
  • Higher tax rates could result in a disincentive to work and hence slow down the economy and reduce long-term tax revenues
• Flexibility


  • Taxes need to be flexible enough to adapt to a change in the economic environment without requiring the rewriting of tax legislation
• Taxation directly impacts on consumers, the government and the economy as a whole
• Taxation has varying impacts depending on the type of tax in question
• Imposition of a sales tax

  Shifts the supply curve of a product to the left due to the higher costs of production
• Shift in supply curve to the left

  Increases the price charged to consumers and reduces the quantity produced and sold
• Depending on the price elasticity of demand for the product

  Could reduce the amount of tax revenue for the government
• Taxation


  Tends to reduce incentives to work and to produce
• Tax cuts


  Can boost domestic spending, thus benefiting individual customers, businesses and the economy (through job creation)
• Tax revenues


  Are essential to fund government spending (such as the construction of schools, hospitals, railways, airports and roads), which fuels economic growth
• Taxation


  Helps to reduce the likelihood of inflation
• Tax cuts


  Boost the disposable income of households and firms, and thus fuel inflationary pressures in the economy
• High corporation tax rates


  Can discourage some companies from locating in certain countries
• Low income tax rates


  Can make it easier to attract workers in certain economies
• Taxation


  Can be used to alter social behaviour by reducing the consumption of demerit goods
• Taxing tobacco and alcohol


  Should, in theory, reduce the demand for such products
• Taxes on cars based on engine size


  Vehicles with larger engines tend to cause more pollution
• Tax avoidance


  The legal act of not paying taxes
• Tax evasion


  The illegal act of non-payment of taxes due, perhaps by a business under declaring its level of profits
• High levels of taxation


  Will tend to encourage both tax avoidance and tax evasion