Worksheets4.5.2 Taxation
Total questions: 31
Worksheet time: 16mins
What is a tax?
A compulsory payment to the government by individuals or firms
A voluntary donation to the government for specific projects
A price charged by private companies for services
A fee paid only when a person receives a government service
Identify 4 reasons for raising taxes by a government.
To raise revenue for public spending on goods and services
To redistribute income and reduce inequality
To discourage consumption of demerit goods (e.g., tobacco) and correct negative externalities
To manage macroeconomic stability by curbing inflationary demand
To encourage monopoly power in markets
Distinguish between direct and indirect taxes.
Direct taxes are levied on income or wealth and borne by the taxpayer; indirect taxes are levied on production or consumption
Both direct and indirect taxes are paid only by firms directly to the government
Direct taxes are added to product prices while indirect taxes are deducted from income
Direct taxes are voluntary while indirect taxes are compulsory
Indirect taxes are charged solely on property ownership
What are the impacts of taxation on AD/AS? (Select more than one).
Higher income taxes reduce disposable income and shift aggregate demand (AD) left
Increased indirect taxes raise production costs and shift short‑run aggregate supply (AS) left
Targeted tax cuts can stimulate AD by increasing consumption
Taxes have no effect on the macroeconomy
Lower corporate taxes can increase investment, shifting AD right and potentially AS right over time
Which item can be identified as a transfer payment funded by taxes?
Jobseeker’s Allowance (JSA)
National Health Service hospital construction
Local road maintenance
Police equipment purchases
Which statement best describes the effect of a progressive tax system as presented in the section on redistributing income?
Helps the relatively less well off at the expense of the better off
Leaves income distribution unchanged
Primarily reduces government spending
Encourages markets to self-correct without intervention
In times of recession or depression, what action(s) can stimulate economic activity?
Increase government spending and/or reduce taxes
Leave markets to clear without intervention
Increase VAT and fuel duty
Cut transfer payments
Under a progressive tax rate, what happens to the percentage of income taken as tax as income rises?
A higher percentage is taken
The percentage remains constant
A lower percentage is taken
The tax becomes voluntary
Under a proportional or flat tax rate, how does the percentage of income taken as tax change as income rises?
It remains constant
It increases
It decreases
It alternates with income cycles
Under a regressive tax rate, how does the percentage of income taken as tax change as income rises?
A lower percentage is taken
A higher percentage is taken
It remains constant
It becomes zero above a threshold
Which of the following is an advantage is associated with a progressive tax system?
Alters income distribution
No influence on income redistribution
Consumers choose how much tax to pay by spending
Eliminates evasion costs
Which drawback is linked to a progressive tax system?
Could damage incentives for high income earners
Hits poorest hardest
No influence on income redistribution
Requires MRT to equal ART
Which drawback is linked to a regressive tax system?
Hits the poorest hardest
Reduces disposable income for high income households
Revenue collected from taxes increase
Encourages high earners to work more
Which statement is listed as a disadvantage of a proportional or flat rate tax?
No influence on income redistribution
Could increase tax evasion
Hits poorest hardest
Requires complex administration
Refer to the bar chart. Which tax category takes the largest share of income for the richest fifth households?
Income tax
National Insurance (NI)
Value Added Tax (VAT)
Council tax and rates
Duties on alcohol, cigarettes and fuel
Refer to the chart, which household group has the highest share of its income paid in VAT?
Poorest fifth
Middle fifth
Richest fifth
All groups pay the same VAT share
Refer to the chart. Which percentile group contributes the largest share of income tax receipts?
Bottom 50%
50–90th percentile
90–99th percentile
Top 1%
Refer to the graph. What is the final income for the top income quintile (richest fifth) shown on the chart?
£85,080
£76,421
£119,946
£85,615
Refer to the chart. What is the Gini coefficient for final income?
26.8%
32.9%
36.5%
37.3%
The chart shows the impact of fiscal drag. What is the best description of fiscal drag?
Freezing tax thresholds increases taxable income without tax rates actually increasing.
Lowering tax thresholds decreases taxable income without tax rates actually increasing.
Increasing tax thresholds increases taxable income without tax rates actually increasing.
Freezing tax thresholds decreases taxable income without tax rates actually increasing.
According to the slide on flat tax pioneers, which pair of academics is credited with first proposing a modern flat tax?
Robert E. Hall and Alvin Rabushka
Milton Friedman and Gary Becker
Paul Samuelson and Robert Solow
Thomas Piketty and Emmanuel Saez
Which items below could be considered as advantages of a flat tax?
Simplifies the tax code
Increases investment
Greater income inequality
Unfair because it is not based on ability to pay
Which items below can be considered disadvantages of a flat tax on the slide?
Revenue could be lost
Could shift the tax burden to lower and middle classes
Lowers inflationary pressure
Increases international competitiveness
In Smith's canons of taxation, which canon specifies that it should be as easy as possible for taxpayers to pay?
Convenience
Certainty
Fairness
Cost
In Smith's Canons of Taxation, which canon states that timings and amounts should be clear?
Certainty
Fairness
Cost
Convenience
According to Adam Smith in The Wealth of Nations, how should the rich contribute to public expense?
More than in proportion to their revenue
Less than in proportion to their revenue
An equal lump-sum amount regardless of income
Only through taxes on consumption
What does the trickle down theory suggest?
Policies favoring high-income individuals and businesses lead to broader prosperity through investment and job creation
Government should increase spending to raise aggregate demand
Central bank should raise interest rates to curb demand
Trade protection raises domestic wages
Which macroeconomic policies would Keynes suggest during an economic downturn?
Use expansionary fiscal policy to boost aggregate demand
Rely on laissez-faire markets with minimal government intervention
Cut interest rates to reduce inflation
Increase taxes and cut spending during recessions
Government Tax Revenue
According to the Laffer Curve, why might total tax revenues fall if the tax rate increases? Choose more than one option.
Increased rates of tax avoidance
Greater incentive to evade taxes
Possible disincentive effects in the labour market
Possible “brain drain” effects
A Russian-born billionaire, JK Rowling and Ed Sheeran all feature in an estimated list of the highest UK tax payers. The top 100 contributors, ranked by the Sunday Times, were judged to have added £??bn to public finances in 2023. Select one option.
£530.5bn
£53.5bn
£5.35bn
£530.5m
