Macroeconomics

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)

Syllabus: 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 Taxes	Last	Previous	Highest	Lowest	Unit
Corporate Tax Rate	34.00	34.00	37.00	25.00	percent	[+]
Personal Income Tax Rate	27.50	27.50	27.50	27.50	percent	[+]
Sales Tax Rate	19.00	19.00	19.00	19.00	percent	[+]
Social Security Rate	39.80	39.80	39.80	39.80	percent	[+]
Social Security Rate For Companies	28.80	28.80	28.80	28.80	percent	[+]
Social Security Rate For Employees	11.00	11.00	11.00	11.00	percent	[+]

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]