1. ECON4
Fiscal Policy & Taxation
Aquinas College Economics Department

2. Fiscal Policy
• Manipulation of
– Public Spending
– Taxation
– Borrowing
• To achieve macroeconomic objectives
• Fiscal Policy is going to have impacts on
Individuals and Business
Aquinas College Economics Department

3. Taxation Objectives
• Funding Government Spending
– As always government need to fund their
spending, taxation can also curb inflationary
pressures
• Management of the Economy
– Rate of tax can influence inflation,
unemployment, growth and the balance of
payments
Aquinas College Economics Department

4. Taxation Objectives
• Income redistribution
– Taxes, through higher and lower rates and
the welfare system can distribute income
more evenly
• Correct Market Failure
– Taxes can discourage consumption of demerit
goods such as alcohol or tobacco, or reduce
negative externalities on some goods
Aquinas College Economics Department

5. Direct Taxes
• These are paid by the individual to HMRC
• Are often progressive taxes
– Income Tax
– Corporation Tax
– Inheritance Tax
– Capital Gains Tax
• They are direct as the liability can’t be
passed onto anyone else.
Aquinas College Economics Department

6. Direct Tax Levels in the UK
Tax Rate (2013-2014)
Income Tax
Basic Rate (£0-£32,010) 20%
Higher Rate (£32,011 - 40%
£150,00)
Highest Rate 45%
(£150,001+)
Inheritance Tax 40% over £325,000
Capital Gains Tax Between 18%-28%
Corporation Tax 21%
Source HMRC
Aquinas College Economics Department

7. Indirect Taxes
• Tax Liability can be shifted depending on
the price elasticity for that product
• These often include
– VAT (Value Added tax)
– Fuel Duty
– Alcohol Duty
– Tobacco Duty
• They are regressive
Aquinas College Economics Department

8. Indirect Tax Levels in the UK
Tax Rate (2013-2014)
VAT
Standard Rate 20%
Reduced Rate 5%
Alcohol Duty* 10p per Pint
Tobacco Duty† 16.5% (Plus other Conditions)
Oil Duty‡ £0.58 per Litre
Source HMRC
*Alcohol Duty varies depending on Alcohol and type – Amount shown is for General
Beer
†Tobacco Duty varies for different types – Amount shown is for Cigarettes
‡ Price for Unleaded Petrol only
Aquinas College Economics Department

9. Arguments with Indirect Tax
Arguments in Favour Arguments Against
Influence consumer spending Inflationary Effects
patterns
Correcting Externalities Lack of Knowledge
Inventive effects (less incentive not Regressive Nature goes against
to work) distributional policies for income
Flexibility – doesn’t require a budget Crime – high rates may encourage an
to change it, but often does increase in crime
Choice – consumers don’t have to buy
the product in question
Aquinas College Economics Department

10. Hypothecation of Tax
• Taxes are raised for a specific purpose
• E.g. Government in the last 10 years
announced that tobacco duty would fund
NHS
• Quite often known as the Benefit
Principle
– The argument that taxes should be linked to
the benefits received by tax payers
Aquinas College Economics Department

11. Progressive | Regressive | Proportional
• Progressive:
– Proportion of tax increases as incomes
increase
• Regressive
– Proportion of tax falls as income increases
• Proportional
– The proportion of tax to income stays the
same as incomes increase
Aquinas College Economics Department