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Public Finance (2) 1

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Page 1: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 1

Page 2: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 2

Economic effects of direct taxes

The net income of workers will ________. Some workers will prefer _______ to work.

Labour supply will _______.

decreaseleisure

decrease

1. An increase in income tax rate

Effect on working incentive

Effect on consumption and general price level

People’s ________________ will be lower. They will reduce their ___________, leading to a lower _______________.

disposable incomeconsumption

standard of living

Since people’s demand for goods and services ________, the general price level will ____.decreases fall

Page 3: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 3

Economic effects of direct taxes

As the ________ from investment is lower, producers’ incentive to invest will ____.

Investment will ________.

net profitfall

2. An increase in profit tax rate

Effect on investment incentive

As profit is an important source of capital, producers’ ability to invest will ____.

decrease

fall

The reward for my hard work!

Government

Retained profit for investment

Page 4: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 4

Economic effects of direct taxes

Landlords’ _________ from property will be lower.

The demand for property will ________ and investment in property will ____.

net income

3. An increase in property tax rate

Effect on real estate business

Their incentive for investing in property will ________.

decrease

decrease

fall

Page 5: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 5

Economic effects of direct taxes

Under a progressive tax system, the high-income group have to pay a _______________ of their income as tax than the low-income group.

The income gap between the high-income group and the low-income group will be ________.

higher percentage

4. Income tax system

Effect on income inequality The income of the

high-income group will drop relatively _____ than the low-income group.more

narrowerThe rich The poor

Tax

Tax

Page 6: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 6

Economic effects of indirect taxes

The price of taxed goods will _______. increase

Sales tax

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

Page 7: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 7

Economic effects of indirect taxes

The price of taxed goods will _______. increase

Sales tax

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.

taxednon-taxed

I will produce less Good X!

I will produce more Good Y!

Company X Company Y

Page 8: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 8

Economic effects of indirect taxes

Since producers will try to pass the _________ to consumers, the price of taxed goods will _______.

tax burden

Sales tax

Effect on price levels As the prices of taxed goods are included in the

__________________, the general price level will _______.

increase

consumer price indexincrease

General price level

Time

Page 9: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 9

Economic effects of indirect taxes

Sales tax is a progressive / regressive tax.

Sales tax

Effect on income distribution

The income gap between the high-income group and low-income group will be ________.

The low-income group have to pay _____________ sales tax than the high-income group.relatively more

widened

Page 10: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

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.

uncertainrelative strengths

Page 11: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

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.

The income gap will be _______.

Since sales tax is __________, the low-income group pays ______________ income as tax than the high-income group.

regressiverelatively more

widened

Page 12: Public Finance (2)1 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply

Public Finance (2) 12

End