Thursday, 3 November 2011

Next Homework:

1) Why may relative income tax rates between countries give only a partial picture
of the international competitiveness of these countries? What else would need to
be taken into account?


Firstly, the income tax may be just one factor in considering whether a country is competitive or not. There are also some social fees, like the insurance. In Germany, for example, high income earners (over 200 000$ per annum) additionally need to pay high social services fees. The aim of this social contract is to take more from the rich and give some of that to poor, so low income earners (below 25 000$ per annmum) are given nearly full healthcare. In U.S. there is no obligation to buy the national insurance, which makes living there cheaper for the citizens. European countries reguraly rob good and hard-working earners and redistribute their money to less gifted and less clever. It definitely does not make these countries attractive...

2) Does making taxes more steeply progressive necessarily act as a disincentive to
output? Explain.


No, if people do not decide to leave their country. Scandinavian countries are great examples. The exorbitant taxes are being paid by citizens without protest, but in exchange everyone is rewarded with high-quality state services. One of the best state education levels in the world and exeptional quality of NHS are supplied to everyone in need. It shows that when a country spends peoples money well, they are not discouraged to stay there and keep earning more.

3) What factors are likely to determine the relative size of the income and
substitution effects of tax changes?


When taxes are increased, people may not feel encouraged to work. They may give up working overtimes or trying to get promted. Simply because their work is less rewarding. Another phenomenon linked with tax increase is "brain drain"- most mobile and talented move out to work abroad.
Opposite things happen when the taxes are decreased.


4) How progressive are income taxes in the UK compared with other countries?
Give examples.


They highly vary. From 0-50%. It is a lot, even coparing to other EU developed states. In Germany it is 14-45%.

5) What externalities (positive and negative) might result from steeply progressive
income tax rates?


Positive: there is nothing good about progressive tax

Negative: Lack of incentive to work, increase of tax-avoiding crimes, brain drain.

6) What determines the international elasticity of supply of labour?


Tax levels, training system, education system, inwood investments, level o benefits etc...

7) What is the Laffer curve? How will the shape of the Laffer curve be affected by
the international mobility of labour and international tax rates?


The Laffer curve is a theoretical representation of the relationship between government revenue raised by taxationand all possible rates of taxation.

The higher the taxes and the higher the mobility, the less revenue. That is because people would simply move abroad with thei earnings and pay less.

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