Paper 3 - M07 P3 3. Text 1: The central issue appears to be...

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M07 P3 3. Text 1: The central issue appears to be whether we want the tax system to alter the distribution of income in favour of the less well-off, thereby reducing absolute and relative poverty. Another way of putting the same question is whether those who can most afford to pay should take a higher share of the burden of financing public spending. For most of the past 100 years, in most Western societies the answer has been yes and progressive tax systems have been used for personal income. For example, in the United Kingdom there are three income tax rates, 10 per cent, 22 per cent and 40 per cent. Economists however, worry about the impact of progressive taxes on efficiency and output. Text 2: Indirect taxes on goods and services, such as a Value Added Tax (VAT) or a Goods and Services Tax (GST), continue to grow as a source of revenue for governments throughout the world, despite being considered regressive and inflationary. 29 of 30 OECD member countries now have a VAT/GST. (a) Define the following terms indicated in bold in the text and data: (i) Gini Coefficient [2] - a measure of inequality in the distribution of income. The candidates may well add more, but this is sufficient for full marks (ii) progressive tax [2] - where the higher the level of income, the higher the percentage of taxation that is paid, OR the higher the level of income the higher the average rate of taxation (b) Using a Lorenz Curve diagram, explain what happened to the distribution of income in the UK between 1984 and 1988. - For drawing a correctly labelled Lorenz Curve diagram showing a shift in the Lorenz Curve away from the diagonal 45 degree line and for providing an explanation that the Gini coefficient increased indicating that income distribution became less equal between 1984 and 1988. (c) Using an appropriate diagram, explain how the introduction of an indirect tax on a good or service will affect its price. - For drawing a correctly labelled diagram showing a shift to the left in the supply curve for a good or service and for providing an explanation that the indirect tax effectively increases the cost of production and decreases supply thus raising price.
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(d) Using information provided and your knowledge of economics, evaluate the use of progressive tax systems to provide a more equitable distribution of income. Answers may include: - considered equitable/fair as the burden of the tax falls mainly on high income earners - reduction in poverty (Text 1 – “alter the distribution of income in favour of the less well-off, thereby reducing absolute and relative poverty” - the revenue can be used to increase government spending on merit goods and public goods - Text 1 – “those who can most afford to pay should take a higher share of the burden of financing public spending” However: - “economists worry about the impact of progressive taxes on efficiency and output” - Overall, higher average taxes may have negative supply side effects - Disincentive effect of higher taxes – people may not be inclined to work harder if their tax rates will
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This note was uploaded on 02/12/2010 for the course ECON 201 taught by Professor Smith during the Spring '10 term at Whittier.

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Paper 3 - M07 P3 3. Text 1: The central issue appears to be...

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