Tuesday, 21 June 2011

More Fiscal Policy

More Fiscal Policy

How can the state use tax revenues to improve human capital?

This is quite straightforward the money raised through taxation can be spent on education, training, providing information of jobs and incentivizing people to study e.g. EMI. The more educated and trained the labour force, the more specialised they are.

What are the different types of taxation? 

  • Direct and indirect 

Direct taxation is tax on incomes so it goes directly out your wallet without choice e.g. Income tax and National Insurance.
Indirect tax is a tax on goods and services which we pay because we choose to indulge in such goods and services e.g. VAT and alcohol duty.
  • Progressive 

Progressive taxation tends to be % because it is a tax which increases according to the size of the income e.g. income tax, the rich pay more than the poor. This tax is usually used for promoting a fairer and more equal society.
  • Regressive

Regressive taxes are like fixed taxes which don’t change if you are rich or poor so whether you ear £5 or £5million you will still pay the same in lets say alcohol duties. This means the proportion of income falls as you become richer and to quote the famous phrase this leads to the “poor becoming poorer”.
  • Proportional 

These type of taxation is not subject to change when incomes change so if your income increases the taxes will not change.

How can government spending and taxation be used to reduce poverty?

The answer to this is quite simple, it is like the Robin Hood idea steal from the rich give to the poor. The government can tax the rich and use that tax revenue to fund benefits from the poor not only eradicating poverty, as the people can never get to poor due to benefits, but reducing inequality. We call such payments transfer payments, transferring tax revenue into benefits.

Laffer Curve 
The Laffer curve isn’t particularly difficult, it simply states that the taxation is only helpful in generating revenue when is it at a particular level. If the tax rate is too high or too low the government’s revenue will all and will not be at its optimum level. PajHolden’s video tutorial on this is very helpful find it below!

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