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Table of Contents

  1. Topic pack - Macroeconomics - introduction
  2. 2.1 The level of overall economic activity (notes)
  3. 2.1 The level of overall economic activity (questions)
  4. Section 2.2 Aggregate demand and supply (notes)
  5. Section 2.2 Aggregate demand and supply (simulations and activities)
  6. 2.2 Aggregate Demand and Aggregate Supply (questions)
  7. 2.3 Macroeconomic objectives (notes)
  8. Low Unemployment
    1. Low Unemployment
    2. What the data says
    3. The meaning of unemployment
    4. Case study - regional variation
    5. Consequences of unemployment
    6. Case study - tougher for men
    7. Types and causes of unemployment
    8. Disequilibrium unemployment
    9. Equilibrium unemployment
    10. Policies to reduce unemployment
    11. Low and stable inflation
    12. Low and stable inflation (notes)
    13. The meaning and measurement of inflation
    14. A consumer price index
    15. Finding out more about consumer price index weights
    16. Problems with measuring inflation
    17. Inflation - videos
    18. Consequences of inflation
    19. Hyperinflation
    20. The consequences of deflation
    21. Types and causes of inflation: demand-pull inflation
    22. Types and causes of inflation: cost-push inflation
    23. Case Study - car prices in Trinidad
    24. Possible relationships between unemployment and inflation
    25. PlotIT - Phillips curve
    26. Phillips curve - long-run
    27. Natural rate of unemployment
    28. NAIRU
    29. Economic growth
    30. Economic growth (notes)
    31. Causes of economic growth
    32. Economic growth and the PPF (1)
    33. Economic growth and the PPF (2)
    34. Economic growth and the business cycle
    35. Economic growth and the aggregate supply curve
    36. Consequences of economic growth
    37. Equity in the distribution of income
    38. Equity in the distribution of income (notes)
    39. Indicators of income equity
    40. Poverty
    41. The poverty line: An Indicator of Relative poverty
    42. The causes of poverty
    43. The role of taxation in promoting equity
    44. The role of taxation in promoting equity (notes)
    45. Other methods of promoting equity
  9. 2.3 Macroeconomic objectives (questions)
  10. 2.4 Fiscal policy (notes)
  11. 2.4 Fiscal policy (questions)
  12. 2.5 Monetary policy (notes)
  13. 2.5 Monetary Policy (questions)
  14. Section 2.6 Supply-side policies (notes)
  15. 2.6 Supply-side policies (questions)
  16. Print View

The role of taxation in promoting equity (notes)

S:\triplea_resources\DP_topic_packs\economics\student_topic_packs\media_development\images\tax.jpgSyllabus: Distinguish between direct and indirect taxes, providing examples of each, and explain that direct taxes may be used
as a mechanism to redistribute income.

Classification of taxes

Direct and indirect taxation

  1. Direct taxation - taxation on income. Direct taxation includes income tax, profits (Corporation) tax and wealth taxes on inheritance. In principle, Direct taxes are removed from income before it is spent.
  1. Indirect taxation - taxation on expenditure. Indirect taxation includes VAT and GST(sales tax) and customs and excise duties (tax on cigarettes, alcohol etc.). In principle Indirect taxes are taxes on spending.
Examples of taxes in Brazil (Source - Trading Economics)

Brazil TaxesLastPreviousHighestLowestUnit
Corporate Tax Rate34.0034.0037.0025.00percent[+]
Personal Income Tax Rate27.5027.5027.5027.50percent[+]
Sales Tax Rate19.0019.0019.0019.00percent[+]
Social Security Rate39.8039.8039.8039.80percent[+]
Social Security Rate For Companies28.8028.8028.8028.80percent[+]
Social Security Rate For Employees11.0011.0011.0011.00percent[+]

Syllabus: Distinguish between progressive, regressive and proportional taxation, providing examples of each.

Progressive, regressive and proportional taxes

Taxes can also be classified according to their impact on different income groups. Taxes, which redistribute from better-off to less well-off groups, are called 'progressive' taxes. Those with an opposite effect are called 'regressive' taxes.

The definitions that you need to know are:

  • Progressive tax - a tax that takes a greater proportion of a income as income rises.
  • Regressive tax - a tax that takes a smaller proportion of a income as income rises.
  • Proportional tax - a tax where the percentage of income paid in taxation always stays the same.

The balance of these types of taxes will have a significant effect on income distribution in an economy. If a government chooses to switch the balance of taxation from progressive to regressive taxes, then the less well-off in society will be hardest hit. In general, direct taxes tend to be progressive and indirect taxes regressive (Can you see why indirect taxes are regressive - even though the tax rate may stay the same?).

Governments with differing objectives will aim to change the balance of direct and indirect taxes. 'Right-wing' governments may choose to shift the balance of taxation from direct to indirect. They will argue that this is more efficient as it allows people to keep more of what they earn - providing greater incentive to work hard. Taxing people on expenditure is also seen as more economically efficient. However, a switch from progressive direct taxes to regressive indirect taxes will have an adverse impact on the distribution of income.

Essay Questions on taxation systems

November 2008

3. (a) Explain the difference between progressive taxation and regressive taxation. [10 marks]

    (b) Evaluate the possible effects of a decrease in direct taxation on a country’s inflation rate, unemployment rate         and balance of payments. [15 marks]