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The Effects of Taxation

The Effects of Taxation. Economic effects of direct taxes. 1. An increase in income tax rate. The net income of workers will ________ . Some workers will prefer _______ to work. decrease. Effect on working incentive. leisure. Labour supply will _______. decrease.

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The Effects of Taxation

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  1. The Effects of Taxation Public Finance (2)

  2. Economic effects of direct taxes 1. An increase in income tax rate The net income of workers will ________. Some workers will prefer _______ to work. decrease Effect on working incentive leisure Labour supply will _______. decrease People’s ________________ will be lower. They will reduce their ___________, leading to a lower _______________. disposable income Effect on consumption and general price level consumption standard of living Since people’s demand for goods and services ________, the general price level will ____. decreases fall Public Finance (2)

  3. Economic effects of direct taxes Government The reward for my hard work! Retained profit for investment 2. An increase in profit tax rate As the ________ from investment is lower, producers’ incentive to invest will ____. net profit fall Effect on investment incentive As profit is an important source of capital, producers’ ability to invest will ____. fall Investment will ________. decrease Public Finance (2)

  4. Economic effects of direct taxes 3. An increase in property tax rate Landlords’ _________ from property will be lower. net income Effect on real estate business Their incentive for investing in property will ________. decrease The demand for property will ________ and investment in property will ____. decrease fall Public Finance (2)

  5. Economic effects of direct taxes Tax Tax The rich The poor 4. Income tax system Under a progressive tax system, the high-income group have to pay a _______________ of their income as tax than the low-income group. higher percentage Effect on income inequality The income of the high-income group will drop relatively _____ than the low-income group. more The income gap between the high-income group and the low-income group will be ________. narrower Public Finance (2)

  6. Economic effects of indirect taxes Red wine $1,200 tax included Sales tax The price of taxed goods will _______. increase Effect on consumption pattern Consumers will buy less / more of taxed goods and less / more of non-taxed goods. Public Finance (2)

  7. Economic effects of indirect taxes I will produce less Good X! I will produce more Good Y! Company X Company Y Sales tax The price of taxed goods will _______. increase Effect on resource allocation Consumers will buy less / more of taxed goods. Producers will produce less / more of taxed goods. Resource will be diverted from ______ goods to _________ goods. taxed non-taxed Public Finance (2)

  8. Economic effects of indirect taxes General price level Time Sales tax tax burden Since producers will try to pass the _________ to consumers, the price of taxed goods will _______. increase Effect on price levels As the prices of taxed goods are included in the __________________, the general price level will _______. consumer price index increase Public Finance (2)

  9. Economic effects of indirect taxes Sales tax Sales tax is a progressive / regressive tax. Effect on income distribution The low-income group have to pay _____________ sales tax than the high-income group. relatively more The income gap between the high-income group and low-income group will be ________. widened Public Finance (2)

  10. Suppose the government imposes a sales tax on a per unit basis and increases the proportional income tax rate. What are the overall effects on the price level? Quiz An increase in income tax will reduce ___________ income. disposable People will then decrease _____________ and the __________________ will fall. consumption general price level A sales tax will reduce / increase general price level. The overall effect on price level is __________, depending on the ______________ of the above two forces. uncertain relative strengths Public Finance (2)

  11. Suppose the government imposes a sales tax on a per unit basis and increases proportional income tax rate. What are the overall effects on the income distribution? Quiz After the increase in proportional income tax, the high-income group will pay a higher / a lower / the same percentage of their income as tax compared with the low-income group. Since sales tax is __________, the low-income group pays ______________ income as tax than the high-income group. regressive relatively more The income gap will be _______. widened Public Finance (2)

  12. End Public Finance (2)

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