Public Finance (2)
1
Economic effects of direct taxes
1. An increase in income tax rate
Effect on
working
incentive
Effect on
consumption
and general
price level
The net income of workers will ________.
decrease
Some workers will prefer _______
leisure to work.
Labour supply will decrease
_______.
People’s ________________
disposable income will be lower.
consumption leading
They will reduce their ___________,
standard of living
to a lower _______________.
Since people’s demand for goods and services
decreases
fall
________, the general price level will ____.
Public Finance (2)
2
Economic effects of direct taxes
2. An increase in profit tax rate
Effect on
investment
incentive
As the ________
net profit from investment is lower,
fall
producers’ incentive to invest will ____.
As profit is an important source of capital,
fall
producers’ ability to invest will ____.
Investment will ________.
decrease
Government
The reward for
my hard work!
Retained profit
for investment
Public Finance (2)
3
Economic effects of direct taxes
3. An increase in property tax rate
Landlords’ _________
net income from property will be
Effect on real lower.
estate
Their incentive for investing in property will
business
decrease
________.
The demand for property will ________
decrease
fall
and investment in property will ____.
Public Finance (2)
4
Economic effects of direct taxes
4. Income tax system
Effect on
income
inequality
Under a progressive tax system, the high-income
group have to pay a _______________
higher percentage of their
income as tax than the low-income group.
The income of the
high-income group
will drop relatively
Tax
Tax
more than the low_____
income group.
The income gap between
the high-income group
and the low-income group The rich The poor
narrower
will be ________.
Public Finance (2)
5
Economic effects of indirect taxes
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.
Red wine
$1,200
tax included
Public Finance (2)
6
Economic effects of indirect taxes
Sales tax
Effect on
resource
allocation
The price of taxed goods will _______.
increase
Consumers will buy less / more of taxed goods.
I
will produce
I will
produce
Producers
will produce less
/ more
of taxed
less
Good X!
more Good Y!
goods.
Resource will be diverted from ______
taxed goods
non-taxed goods.
to _________
Company X
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Company Y
7
Economic effects of indirect taxes
Sales tax
Effect on
price levels
tax burden to
Since producers will try to pass the _________
increase
consumers, the price of taxed goods will _______.
As the prices of taxed goods are included in the
consumer price index the general price level
__________________,
will _______.
increase
General price level
Time
Public Finance (2)
8
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
relatively more sales tax than the high_____________
income group.
The income gap between the high-income
group and low-income group will be
widened
________.
Public Finance (2)
9
Quiz
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?
An increase in income tax will reduce ___________
disposable income.
People will then decrease _____________
consumption and the
__________________
general price level will fall.
A sales tax will reduce / increase general price level.
The overall effect on price level is __________,
uncertain
depending on the ______________
relative strengths of the above two
forces.
Public Finance (2)
10
Quiz
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?
After the increase in proportional income tax, the highincome group will pay a higher / a lower / the same
percentage of their income as tax compared with the lowincome group.
Since sales tax is __________,
regressive the low-income group pays
______________
relatively
more income as tax than the high-income group.
The income gap will be _______.
widened
Public Finance (2)
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End
Public Finance (2)
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