• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Why do we have taxes?

Extracts from this document...


Why do we have taxes? Taxes are important for a number of reasons. In the UK, the government provides health care, defence and education, as well as things like libraries. These services are paid for (taxes) and produced by the public sector. The government also pays the private sector for goods and services such as new roads and electricity for street lamps. Taxes can also be used to change demand in certain markets, in order to promote or discourage activity. For instance, by imposing taxes on goods with negative externalities, such as alcohol and pollution producing services, demand is decreased and so are the negative side effects of production. Similarly, by exempting books from VAT, demand increases, resulting in a more books being bought and read. Governments may alter the tax rate in order to manage the economy as a whole. The tax rate can influence unemployment, inflation and the balance of payments, and being able to alter it is useful for the government should they need to change these variables. ...read more.


A classical model of the economy became more popular for governments to work with. The government tried to tackle the problems raised by AD management by implementing Supply Side policies. Supply side policies aim to increase the productive potential of an economy, and supply side issues also help to explain economic events. For instance, a high income tax may cause disincentives to work, as the reward it not so high. High taxes on profits made by a firm (corporation tax) cause a disincentive to enterprise: in order to encourage enterprise, we must reduce this tax. Investment by firms increases the capital stock (factories, offices) of a country, which boosts the AS curve. Firms invest in order to make a profit. If the government reduces corporation tax or provide investment allowances, more investment will take place. High marginal rates of direct taxation, income tax in the case of workers, undermine the economic incentives to work. ...read more.


Indirect taxes, such as VAT, tend to be a regressive tax. A regressive tax is a tax where the proportion of income paid falls as income rises. This type of tax is deemed inequitable, as the ability to pay tax is not taken into account: people on higher incomes should pay more tax, as they can afford it. Progressive taxes are taxes where the proportion of income paid increases as the income of the tax payer increases. Income tax is progressive; when income rises above a certain amount, each extra pound earned is taxed at a higher rate. This method of taxation is seen as equitable, as people with higher income are able to pay more. From the early 80s, the burden of taxation has been shifted from better to worse off, as the cuts in higher band income tax and the introduction of the poll tax took effect. From the early 90s, however, the poll tax was replaced by the council tax and income tax cuts favoured the less well off. Overall, the tax system remains slightly progressive. ?? ?? ?? ?? Nick Poulden ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Recession, Tax Cuts and Budget Deficits.

    Increase of the child credit 4. 10% deduction for married couples (referred to as elimination of the "Marriage Penalty") The income tax changes consisted of tax cuts throughout most income brackets. It also added a new bracket at the bottom of the income scale (bracket 1 in Table 1).

  2. Split Votes: A Nation Divided on the Marijuana/Drug Legalization Debate

    they do not say they are opposed to taking government money either. There is the possibility that, in order to attract funds from the government and/or its members, the Hudson Institute sides with them on this issue. Drug prohibition, and its expansion, is a topic the government has been firm on for decades.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work