I got a question here hope someone can help me with it and give me answer.
Explain why government impose taxes? [6]
can give me some links to help me with it. thx.
Got 'O' Level Economics now?
i mean i am sec3 now taking o-level econs. can help me?
1.to deal with market failure: Allocative inefficiency occurs when there are externalities to consumption or production. So using taxes the govt can reduce these externalities. For example, smoking doesnt just damage the smoker's health, it affects society. So its a negative externality. By taxing cigarettes the govt can reduce the impact.
2.to lower demand pull inflation: when excessive demand leads to creeping inflation the government might increase taxes to reduce the disposable income of consumers so aggregate demand falls and thus inflation is curbed.
3.to protect domestic industries: by taxing foreign goods coming into the country the govt can be them as expensive or more expensive than locally produced goods. Thus allowing the local producers to remain comptetive.
thx. i have 1 more. What might happen if a govt increases income tax rates?
It varies with each income group. Lower income group is more income elastic than higher income group, therefore increasing income tax rates could cause a greater fall in consumption from the lower income group as compared to the higher income group.
Also, income tax is a type of progressive tax rates, therefore increasing income tax rates will widen the income gap, hence sacrificing the government's micro-economic aim of income equality, thus leading to market failure.
However, on the macro-economy level, increasing income tax rates is used usually as part of a contractionary fiscal policy in an attempt to decrease the Aggregate Demand (AD) of the economy and especially in times to solve macro-economic problems such as inflation (specifically demand-pull inflation)
On an additional note, increaing income tax rate will decrease the size of the miultiplier, k since the formula of k is given as 1/mpw. MPW refers to the marginal propensity to withdraw (MPW) and comprises marginal propensity to save, marginal propensity to tax and marginal propensity to import since these are all known as leakages, i.e money is being leaked out of the circular flow of income.
An increase in income tax rate will increase the marginal propensity to tax, hence increasing the Marginal Propensity to Withdraw, thus cuasing the size of the multiplier k to become smaller, and if k is small, the effectiveness of fiscal policy will be limited.
Hope I answered your questions.
econs o level have text book. read the text book, google, whatever. than ask more in dept question, not text book question...