Prelim Economics: Help with Government Taxation! (1 Viewer)

[cs01001]

Hey,

What are the advantages and disadvantages of progressive/regressive and proportional taxation? I can't seem to find any in Riley's textbook :mad1:

Oh, and what is the difference between Structural and Cyclical Component in the Fiscal policy?

Thanks.

 

[Fuzzy Juzzy]

Progressive taxation: Advantages include a more equal distribution of income, as those high income earners are taxed at a higher rate, allowing the government to redistribute their income as government expenditure on lower income earners. Progressive taxation goes hand in hand with transfer payments as the two main automatic stabilisers in the economy.

Disadvantages: A diminished incentive to improve productivity. Wages in general (and more so now with the introduction of Howard's WorkChoices labour market reforms) are established based on productivity and employee performance. If an employee will get 49% of their gross income taxed, they'll probably prefer to achieve a greater balance between their work and leisure life.

Couldn't be bothered with the other taxes...

Structural components of Fiscal Policy (and indeed ANY policy) are those intended to come into effect by the government. Examples include increased expenditure on health. Cyclical components are not necessarily intended by the government, yet come about by the business cycle - examples include an increase in government revenue BECAUSE an expansionary phase of the cycle leads to rising wages and thus rising taxation rates (as mentioned above).

Good luck!