2. Public Finance (2)1

3. 2 Economic effects of direct taxes The net income of workers will ________. Some workers will prefer _______ to work. Labour supply will _______. decrease leisure decrease 1. An increase in income tax rate Effect on working incentive Effect on consumption and general price level People’s ________________ will be lower. They will reduce their ___________, leading to a lower _______________. disposable income consumption standard of living Since people’s demand for goods and services ________, the general price level will ____. decreasesfall

4. Public Finance (2)3 Economic effects of direct taxes As the ________ from investment is lower, producers’ incentive to invest will ____. Investment will ________. net profit fall 2. An increase in profit tax rate Effect on investment incentive As profit is an important source of capital, producers’ ability to invest will ____. decrease fall The reward for my hard work! Government Retained profit for investment

5. Public Finance (2)4 Economic effects of direct taxes Landlords’ _________ from property will be lower. The demand for property will ________ and investment in property will ____. net income 3. An increase in property tax rate Effect on real estate business Their incentive for investing in property will ________. decrease fall

6. Public Finance (2)5 Economic effects of direct taxes Under a progressive tax system, the high-income group have to pay a _______________ of their income as tax than the low-income group. The income gap between the high-income group and the low-income group will be ________. higher percentage 4. Income tax system Effect on income inequality The income of the high-income group will drop relatively _____ than the low- income group. more narrower The richThe poor Tax

7. Public Finance (2)6 Economic effects of indirect taxes The price of taxed goods will _______. increase Sales tax Effect on consumption pattern Consumers will buy less / more of taxed goods and less / more of non-taxed goods. Red wine $1,200 tax included

8. Public Finance (2)7 Economic effects of indirect taxes The price of taxed goods will _______. increase Sales tax Effect on resource allocation Consumers will buy less / more of taxed goods. Producers will produce less / more of taxed goods. Resource will be diverted from ______ goods to _________ goods. taxed non-taxed I will produce less Good X! I will produce more Good Y! Company XCompany Y

9. Public Finance (2)8 Economic effects of indirect taxes Since producers will try to pass the _________ to consumers, the price of taxed goods will _______. tax burden Sales tax Effect on price levels As the prices of taxed goods are included in the __________________, the general price level will _______. increase consumer price index increase General price level Time

10. Public Finance (2)9 Economic effects of indirect taxes Sales tax is a progressive / regressive tax. Sales tax Effect on income distribution The income gap between the high-income group and low-income group will be ________. The low-income group have to pay _____________ sales tax than the high- income group. relatively more widened

11. Public Finance (2)10 Suppose the government imposes a sales tax on a per unit basis and increases the proportional income tax rate. What are the overall effects on the price level? Quiz An increase in income tax will reduce ___________ income.disposable People will then decrease _____________ and the __________________ will fall. consumption general price level A sales tax will reduce / increase general price level. The overall effect on price level is __________, depending on the ______________ of the above two forces. uncertain relative strengths

12. Public Finance (2)11 Suppose the government imposes a sales tax on a per unit basis and increases proportional income tax rate. What are the overall effects on the income distribution? Quiz After the increase in proportional income tax, the high- income group will pay a higher / a lower / the same percentage of their income as tax compared with the low- income group. The income gap will be _______. Since sales tax is __________, the low-income group pays ______________ income as tax than the high-income group. regressive relatively more widened

13. Public Finance (2)12 End