Essay Plans
'The only reason for levying tax is to raise revenue.' Discuss.
SYNOPSIS:
This essay asks the candidate to discuss the reasons for levying tax as a control instrument (eg against inflation) and as a means of financing expenditure. Figures are needed for elements of public expenditure eg. Education as well as the current basic rates of VAT, Income Tax and Corporation Tax. Any changes in the latest budget should be incorporated. On a wider basis mention could be made for the switch in tax emphasis away from direct to indirect.
POINTS:
- Linking the aims with the overall macro-economic objectives (reduce
inflation, unemployment, increase growth etc):-
- Raise revenue for government spending (Defence, Health, Education) to smooth out a recession and reach a state of full-employment (Keynes). Pre-Keynesian view is that revenue is THE MOST IMPORTANT function of taxation.
- To correct market failures
- tax monopoly profits
- negative tax - subsidies - to encourage production and/or consumption
- redistribute income (progressive tax)
- encourage consumption of merit goods, discourage demerit goods, finance public goods.
- Keynes - use taxation, public spending and budget as policy instruments in discretionary fiscal policy for economic demand management.
- Contrast the Monetarism which aims for low taxes and low government spending and a balanced budget.
- The tax burden = total tax taken ÷ National Income.
This is higher even after the 88/89 reductions - than when the Conservatives came into office in 1979. As the top heavy population continues to increase the dependency ratio, it is feared the tax burden will increase. Tax cuts are seen as a prerequisite of economic growth BUT Norway had a tax burden of 46% of GDP in 1983 (growth of 3.8%) but Switzerland had a rate of 31% of GDP with a growth of 0.3% (UK had 33% with a growth 1973-83 of 1%).
- Finally, a rise income tax COULD increase revenue as it will have both an income substitution effect:- an income effect : real income reduced via higher taxes (less consumption of all items including leisure) thus more work is performed; substitution effect : leisure is now cheaper via higher taxes since less real income is now sacrificed for each unit of leisure consumed. The substitution effect leads to cheaper leisure being substituted for work i.e. less work.
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