Taxation

• Progressive taxes - as income rise, a larger % of income is paid in tax

  Proportional taxes - the % of income paid in tax is constant

  Regressive taxes - as income rises, a smaller % of income is paid
• Free market economists believe that lower tax rates increases incentives to work (extra hours) and so improves the economy's supply side performance. A tax on profits also lead to less incentive for firms to invest
• The Laffer curve shows that when tax is risen to point L, revenue rise. But a further increase from L to M causes a fall in revenue. It shows that taxes rising will increase tax revenue to a certain point
• Progressive taxes tend to redistribute income from those with higher to those with lower incomes.
• An increase in taxes reduces AD as taxes are a leakage. This can decrease output and increase unemployment. In the long run, taxes impact AS. Lower taxes can incentivise higher investment by firms so a rise in growth and employment
• Trade balance - a rise in tax reduces RDI and consumption, reducing demand for imports and improving the trade balance

  FDI - higher corporation tax deters FDI if rates are higher than other countries

  Price - rise in indirect taxes can be inflationary if it causes a downward spiral. Increased tax, increases wage demand and COQ, meaning cost push inflation ...