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Stating your assumptions carefully, outline the likely impact of an increase in taxation on the interest rate.
The first 200 words of this essay...
Stating your assumptions carefully, outline the likely impact of an increase in taxation on the interest rate.
Before discussing the effects of increased taxation on the interest rate, it is important to distinguish what type of taxation is being increased. Taxation is defined as any compulsory payment from an individual or institution to central or local government. There are two main types of tax - direct and indirect taxes. Direct taxes are taxes on income (a percentage of a worker's wage), profits (a percentage of a firm's profits) and wealth (for example a percentage of somebody's inheritance). Indirect taxes are taxes on consumption, for example Value Added Tax, which is a percentage of the price of a good sold. An increase in the rate of any of these taxes will have a similar effect on the economy as a whole. However the government can use taxation to target certain parts of the economy for taxation revenue. For example to reduce investment spending it could increase corporation tax.
If the government were to increase income tax, the effect on the economy would be that the level of aggregate demand would fall, assuming that all other factors remained constant
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Review of essay
Rating: 5 star(s)
Response to the question
This essay engages superbly with the question. I liked how there was a progression from defining taxation onto analysis of how it affects interest rates, and then an evaluative paragraph discussing what other factors need to be considered. A clear structure such as this ensures that the essay is always focused on the task, whilst still showing all the skills necessary.
Level of analysis
The analysis in this essay is strong, but as the diagrams are not included I can only assume they were right. There is a good awareness shown between indirect and direct taxes, and relevant examples are used well. What is particularly good about this essay is the explanation of the diagram. For example referring to "where IS shifts to IS1, the equilibrium level of income falls from Y1 to Y2" shows a full understanding of the diagram and the effects a shift can cause. There are some sophisticated concepts explored here, such as the marginal propensity to consume, which shows a strong understanding. I was pleased to see the phrase "ceteris paribus" used, as the task clearly states to mention any assumptions. By using this, it shows that you understand you cannot look at the changes without isolating one variable, whilst keeping the rest equal. The evaluative paragraph is very strong, picking out reasons why the change in interest rate isn't as clear cut. Being able to pick out determining factors, or external influences is a great way to get evaluative marks! I particularly liked the language used such as "the tax multiplier is dependent upon", "on the other hand" and "if the LM curve is very steep" as it shows a strong understanding of multiple factors and different situations.
Quality of writing
This essay is structured well, having a clear introduction defining the key terms, and a strong conclusion posing a justified judgement. The points are well detailed, and it always stays on focus throughout. Technical terms are used well, and spelling, punctuation and grammar are strong. A strong essay!
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