gcse economics - tools of the trade: taxation - why use it?

1. To collect money to pay for Government expenditure. In 2002 it will collect approximately £400 billion. This will be spent on health, education, social security, roads etc.

2. To influence buying patterns. High taxes on cigarettes discourage smoking. Taxes on petrol encourage motorist to buy less fuel.

3. To help redistribute income between individuals. It is highly likely that high earners will pay more income tax and VAT, this is because they earn and spend more. If this money is given to the poor and unemployed in the form of benefits it has been redistributed.

4. To manage the economy
(a) Increasing the level of income tax will usually slow down the economy. This is because people pay more tax, have less disposable income and buy fewer goods. This is a policy for slowing down inflation.

Increase income tax
> People pay more tax out their wage
> their disposable income falls
> they are able to buy fewer goods
> less demand in the economy
> helps to control inflation / price rises

(b) Decreasing the level of income tax will usually ‘kickstart’ the economy. This is because people pay less tax, have more disposable income and buy more goods. This is a policy for increasing economic growth and reducing unemployment.

Decrease income tax
> People pay less tax out of their wages
> their disposable income increases
> they can buy more goods
> more demand in the economy
> helps economic growth and reduces unemployment

 ACTION

A About 70% of the price of a pint of alcohol is tax. What are the arguments for and against this?
B Try to explain why a reduction in income tax will kickstart the economy
C How could income tax redistribute income? Should the tax be progressive or regressive?

 SMART THINKING

D Would you be more likely to tax a price inelastic or price elastic good?