David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

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14. l Taxation and government spending G QI E 0 \I c >< 0 .. I .. II) A. 0 The 45° line OG shows zero taxes or transfers so that pre-tax and post-tax income coincide. With an allowance OA, then a constant marginal tax rate t, the post-tax income schedule is OBCD. The slope depends only on the marginal tax rate [on BCD it is {l - t)]. The average tax rate at any point D is the slope of OD. A tax is progressive if the average tax rate rises with pre-tax income. 0 Figure 14.1 A Pre-tax income A progressive income tax higher is the average tax rate. Even with a constant marginal tax rate, and a constant slope along BC, the initial tax allowance makes the tax structure progressive. The higher an individual's gross income, the smaller is the tax allowance as a percentage of gross income, so the larger is the fraction of total income on which tax is paid. But Table 14.3 shows that marginal tax rates may also rise with income. As individuals move into higher tax bands they pay higher marginal tax rates, moving on to even flatter portions of the tax schedule. The average tax rate now rises sharply with income. Table 14.3 shows that UK marginal tax rates have fallen a lot in the past two decades, especially for the very rich. A millionaire paying an 83 per cent tax rate on all taxable income except the first £70 000 in 1978 paid only 40 per cent in 2008/09. The UK was not alone in cutting tax rates. There was a worldwide move to cut tax rates, especially for the very rich. In part, this reflected the belief that tax rates were previously so high that distortions had been large. However, it also reflected increasing competition between governments to attract mobile resources (physical and human capital) to their country. At the end of the chapter we discuss how cross-border mobility undermines national sovereignty. Taxation and government spending Government spending, and the taxes that finance it, are now about 45 per cent of national output. Figure 14.2 shows the composition of government spending and revenue in 2007 /08. Nearly a third of total government spending went on transfer payments such as social protection of pensions, jobseeker's allowance (formerly unemployment benefit) and debt interest. Of the remaining spending directly on goods and services, the most important spending categories are health, defence and education. Figure 14.2 also shows how this government spending is financed. The most important direct taxes are income tax, and corporation tax on company profits. The most important indirect taxes are value added tax (VAT) and customs duties. Note that, since state provision of retirement pensions is included on the expenditure side as a transfer payment, pension contributions under the national insurance scheme are included on the revenue side. A transfer payment requires no good or service in return during the period in which it is paid. Direct taxes are taxes on income and wealth. Indirect taxes are taxes on spending and output. 337
CHAPTER 14 Government spending and revenue Where taxpayers' money is spent Social protection2 - £ 1 61 bn Personal social services - £28bn Health - £104bn - -- - Other expenditure ---... 1 - £59bn - Housing and environment - £22bn Transport - £20bn Public order and safety - £33bn Industry, agriculture, employment and training - £21 bn Debt interest - £30bn Defence - £32bn <strong>Education</strong> - £77bn Source: HM Treasury. 2007-08 near cash projections. Figures may not sum to total due to rounding. Total managed expenditure - £587 billion 1 Other expenditure includes spending on general public services; recreation, culture, media and sport, international co-operation and development; public service pensions; plus spending yet to be allocated and some accounting adjustments. 2Social protection includes tax credit payments in excess of an individual's tax liability. Where taxes come from Business rates - £22bn Total receipts - £553 billion Council tax - £23bn Income tax - £157bn Corporation tax - £50bn Excise duties - £41 bn --....- National insurance - £95bn 10ther includes capital taxes, stamp duties, vehicle excise duties, and some other tax and non-tax receipts {e.g. interest and dividends). Source: HM Treasury. 2007-08 projections. Figures may not sum to total due to rounding. Figure 14.2 UK government expenditure and revenue, 2007 /08 The government in the market economy How do we justify government spending in a market economy? A public good, if consumed by one person, must be consumed by others in exactly the same quantity. Public goods In Chapter 13 we introduced the idea of public good as market failure. Here, we discuss this issue in more detail. 338
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• David Begg, Gianluigi Vernasca,
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Economics 10th Edition David Begg,
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Brief Table of Contents Preface xii
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5 Consumer choice and demand decisi
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PART FOUR Macroeconomics l 5 Introd
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PART FIVE The world economy 28 Inte
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Changes to the tenth edition After
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Guided tour In addition to illustra
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Aiding Understanding Hy the end of
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Rent ceiling in Sweden* More on pri
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13 General vs partial equilibrium:
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26 Growth and competition* Case Neo
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Cl INSTRUCTORS ... Would you like y
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Additional technology to enhance le
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Custom Publishing Solutions • cre
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Acknowledgements for the tenth edit
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Finally, special thanks to the foll
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---.. . - Introduction Economics is
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CHAPTER 1 Economics and the economy
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Learning Outcomes By the end of thi
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CHAPTER 2 Tools of economic analysi
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CHAPTER 3 Demand, supply and the ma
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4.1 The price responsiveness of dem
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4.2 Price, quantity demanded and to
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4.2 Price, quantity demanded and to
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4.4 Short run and long run simultan
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4.6 The effect of income on demand
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4.6 The effect of income on demand
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4.8 Elasticity of supply The elasti
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4.9 Who really pays the tax? S' - G
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Summary What are the effects of the
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Review questions 5 Common fallacies
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5.1 Demand by a single consumer is
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5.1 Demand by a single consumer Ill
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5.1 Demand by a single consumer QF
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5.1 Demand by a single consumer whe
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5.1 Demand by a single consumer How
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5.2 Adjustment to income changes ou
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5.3 Adjustment to price changes and
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5.3 Adjustment to price changes Thi
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5.3 Adjustment to price changes imp
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5.3 Adjustment to price changes Q '
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5.5 Complements and substitutes it
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5.6 Transfers in kind that to the s
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Review questions • The market dem
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Our theory of consumer choice assum
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APPENDIX Consumer choice with measu
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6.2 A firm's accounts A sole trader
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6.2 A firm's accounts Inventories I
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6.2 A firm's accounts Earnings When
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6.4 Corporate finance and corporate
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6.5 The firm's supply decision Tabl
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6.6 Marginal cost and marginal reve
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6. 7 Marginal cost and marginal rev
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Review questions in total cost when
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7.2 Production in the short run: di
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7.2 Production in the short run: di
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7.3 Short-run costs As you can see
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7.3 Short-run costs 60 50 SMC - 40
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7.3 Short-run costs down average co
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7.4 A firm's output decision in the
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7.6 Long-run total, marginal and av
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7. 7 Returns to scale - "O 0 DI ..
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7. 7 Returns to scale Scale economi
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7. 7 Returns to scale Table 7.10 Mi
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--1-----1 7.8 The firm's long-run o
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Summary Summary • This chapter di
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Review questions 8 Suppose that fir
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8.1 Perfect competition Perfect com
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8.2 A perfectly competitive firm's
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8.2 A perfectly competitive firm's
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8.3 Industry supply curves In the s
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8.4 Comparative statics for a compe
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.. 8.6 Profit-maximizing output for
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8.6 Profit-maximizing output for a
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8. 7 Output and price under monopol
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8. 7 Output and price under monopol
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8.8 A monopoly has no supply curve
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8.9 Monopoly and technical change f
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8.10 Natural monopoly 'ti QI 0 :I P
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Review questions • Adding at each
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9 .1 Why market structures differ D
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9 .1 Why market structures differ T
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9.3 Oligopoly and interdependence A
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9.3 Oligopoly and interdependence T
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9.4 Game theory and interdependent
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9.5 Reaction functions demand curve
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9.5 Reaction functions Deriving the
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9.5 Reaction functions Mergers and
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9.5 Reaction functions The Stackelb
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9.7 Strategic entry deterrence Inno
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9.8 Summing up Barriers at the chec
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Review questions Review questions c
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I 0.1 The firm's demand for factors
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10.2 The firm's demand for labour i
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10.3 The industry demand curve for
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10.4 The supply of labour Table 10.
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10.4 The supply of labour A reducti
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10.5 Industry labour market equilib
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10.5 Industry labour market equilib
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10.6 Transfer earnings and economic
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10. 7 Do labour markets clear? Mini
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10. 7 Do labour markets clear? How
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10.8 UK wages and employment Table
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Summary reducing demand for both fa
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Review questions In a graph with th
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APPENDIX Isoquants and the choice o
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11.2 Rentals, interest rates and as
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11.3 Saving, investment and the rea
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11. 5 The supply of capital service
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11.6 Equilibrium and adjustment in
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11.8 Land and rents supply of skill
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11.9 Income distribution in the UK
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Summary of average earnings. As liv
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Review questions the quantity of ca
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12.l Individual attitudes to risk S
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12.2 Insurance and risk Life assura
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12.3 Asymmetric information The uti
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12.3 Asymmetric information Executi
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12.4 Uncertainty and asset returns
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Page 398 and 399: 15.2 Some facts Annual real output
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16.3 Equilibrium output C'I ·- c -
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16.4 Another approach: planned savi
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16. 5 A fall in aggregate demand A
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16.7 The paradox of thrift Table 16
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16.8 The role of confidence The cha
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Review questions 2 Suppose the MPC
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17 .2 Government and aggregate dema
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17.4 Deficits and the fiscal stance
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17.5 Automatic stabilizers and disc
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17 .6 The national debt and the def
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17. 7 Foreign trade and income dete
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17. 7 Foreign trade and income dete
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Summary and employment. In Figure 1
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Review questions 2 The government s
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18. 1 Money and its functions The m
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18.2 Modern banking M_o_d_er_n_ha
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18.3 How banks create money How did
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18.4 Financial crises However, ther
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18.4 Financial crises UK bank inter
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18.5 The traditional theory of mone
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18.6 UK money supply after the 2006
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18. 7 The demand for money flow and
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18. 7 The demand for money Table 18
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Review questions • Financial dere
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19.2 Traditional means of monetary
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19 .3 Lender of last resort Second,
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19.4 Equilibrium in financial marke
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19.5 Monetary control However, more
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19.5 Monetary control UK quantitati
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19. 7 The transmission mechanism AD
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19. 7 The transmission mechanism Wh
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19. 7 The transmission mechanism In
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19. 7 The transmission mechanism He
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Review questions • A higher inter
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20.2 The IS-LM model T_he_IS_-_L_
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20.2 The IS-LM model Until 2008 mon
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20.3 The IS-LM model in action Fisc
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20.4 Shocks to money demand Hence,
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20.5 The policy mix IS schedule, IS
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20.6 The effect of future taxes Que
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Summary helped explain positive UK
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Review questions IS-LM diagram, rec
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21. l Inflation and aggregate deman
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21.2 Aggregate supply demand. The A
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21.3 Equilibrium inflation AS0 AS,
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21.3 Equilibrium inflation It was c
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21.4 The labour market and wage beh
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21.6 The adjustment process The eco
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21. 7 Sluggish adjustment to shocks
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21.8 Trade-offs in monetary objecti
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21.8 Trade-offs in monetary objecti
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Review questions • In practice, w
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22. l Money and inflation rises wit
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22.2 Inflation and interest rates N
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22.3 Inflation, money and deficits
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22.4 Inflation, unemployment and ou
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22.5 The costs of inflation find th
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22.5 The costs of inflation You los
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22.6 Controlling inflation Without
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22. 7 The Monetary Policy Committee
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Summary 18 16 14 12 10 8 6 4 2 0 He
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Review questions Money growth (%) I
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23. l The labour market may simply
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23.2 Analysing unemployment The fig
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23.2 Analysing unemployment of an h
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23.3 Explaining changes in unemploy
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23.4 Cyclical fluctuations in unemp
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23.5 The cost of unemployment Count
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23.5 The cost of unemployment in th
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Review questions • Most European
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24.1 The foreign exchange market do
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24.2 Exchange rate regimes ... ii)
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24.3 The balance of payments statis
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24.4 The real exchange rate In row
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24.6 The financial account Table 24
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24.6 The financial account This sec
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24. 7 Internal and external balance
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24.8 The long-run equilibrium real
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Summary This figure is helpful in t
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Review questions Review questions c
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25. l Fixed exchange rates So far,
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25. l Fixed exchange rates Gordon B
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25. l Fixed exchange rates A shock
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25.3 Devaluation 1 .., Devaluation
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25.3 Devaluation Table 25.1 The 196
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25.4 Floating exchange rates UK. Af
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25.5 Monetary and fiscal policy und
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25.5 Monetary and fiscal policy und
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Summary Summary • With a fixed ex
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Review questions 11 The following t
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26. 1 Economic growth Table 26.1 Re
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26.2 Growth: an overview In the lon
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26.3 Technical knowledge Learning b
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26.4 Growth and accumulation increa
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26.5 Growth through technical progr
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26.6 Growth in the OECD II : e!p ;:
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26.6 Growth in the OECD Within the
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26.6 Growth in the OECD Annual real
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26.8 The costs of growth rate g? If
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Review questions • Potential outp
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2 7 .1 Trend and cycle: statistics
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27.2 Theories of the business cycle
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27.2 Theories of the business cycle
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.. 27.2 Theories of the business cy
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27 .3 Real business cycles provides
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27.4 Towards a consensus: supply-si
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27.5 An international business cycl
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Review questions • Some swings in
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The world economy Part Five focuses
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CHAPTER 28 International trade Is t
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CHAPTER 28 International trade Tabl
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CHAPTER 28 International trade The
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CHAPTER 28 International trade Comp
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CHAPTER 28 International trade Conv
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CHAPTER 28 International trade Fanc
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CHAPTER 28 International trade The
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CHAPTER 28 International trade High
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CHAPTER 28 International trade thei
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CHAPTER 28 International trade Of c
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CHAPTER 28 International trade Conc
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CHAPTER 28 International trade SS
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CHAPTER 28 International trade 7 Wh
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CHAPTER 29 Exchange rate regimes Ta
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CHAPTER 29 Exchange rate regimes co
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CHAPTER 29 Exchange rate regimes re
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CHAPTER 29 Exchange rate regimes 0.
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CHAPTER 29 Exchange rate regimes It
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CHAPTER 29 Exchange rate regimes Ta
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CHAPTER 29 Exchange rate regimes 0
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CHAPTER 29 Exchange rate regimes th
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CHAPTER 29 Exchange rate regimes
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Activity 1.1 (a) (b) Activity 2.1 (
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Answers to activity questions Activ
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Answers to activity questions Activ
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Absolute advantage an individual, c
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Glossary Demand for money a demand
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Glossary Gross domestic product (GD
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Glossary Marginal product the margi
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Glossary Percentage change the abso
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Glossary Sole trader a business own
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A absolute advantage 11-12 internat
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Index commodity composition of trad
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Index elasticity of supply 82-4 ele
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Index happiness 594 new products 59
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Index Laffer curve supply-side econ
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Index exports 369 foreign countries
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Index reading diagrams 34-5 real bu
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Index future taxes effect 475-7 gov
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David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

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