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Be Your Own Chancellor Worksheet

Sue Hall
Head of Sixth Form
Embley Park School
Romsey

This worksheet is designed to help you understand the implications of changes on taxation on different income groups and government revenue.

The assignment aims to:

• Show you how to participate in The Virtual Economy
• Illustrate the implications of direct and indirect tax changes on different income groups
• Show how tax changes affect the level of government revenue

Before working through this exercise it is worth familiarising yourself with all aspects of taxation by working through the taxation worksheet (http://www.bized.co.uk/learn/economics/govpol/macropolicies/tax/studenta.htm) on the Biz/ed site. You might also like to visit the Institute of Fiscal Studies (http://www.ifs.org.uk) and the Treasury (http://www.hm-treasury.gov.uk).

The Institute of Fiscal Studies provides a useful search facility which will guide you to the information you require on any Fiscal aspect.

Go Ahead! Be Your Own Chancellor - try the Virtual Economy.......

Read the general introduction.
To change the values click in the drop-down boxes and then press the run model button. Your results will then be displayed.

Complete the following exercises and then experiment by making your own decisions. Be aware of the impact on Government Revenue.

Step 1
Direct Tax Changes

Direct tax is taxation taken directly from income. Use the Help button to fully understand Income tax and then change the Income tax bands to 30, 40 and 60 pence in the £.

What are the effects on the following income groups?

1) An employed single parent with one child £9k/yr

2) A two earner couple with two children £17k/yr

3) A two earner couple with two children £100k/yr

What is likely to be the effect on Government Revenue?

What are the main disadvantages of a high level of direct taxation? (You may want to consider the incentive effects and income loss.) What are the effects on aggregate demand and supply?

Reduce the levels of income taxation to 5, 20, and 30 pence in the £.

What are the effects on the income groups used previously?

1)

2)

3)

A reduction in the level of direct taxation is part of Supply Side Policy. Supply Side polices are policies such as labour market reform, privatisation, deregulation and tax reform which aim to deliver long term improvements in aggregate supply and economic efficiency.

What problems could result from a reduction in direct tax? Think about revenue and macro economic problems. What are the effects on aggregate demand and supply?

Step 2
Indirect Tax Changes

Indirect tax is tax on expenditure. Increase the level of VAT to 20%.

What are the effects on the following income groups?

1) An Employed single parent earning £9k per year

2) An unemployed person

3) A two earner couple earning £50 k per year

What is likely to be the effect on Government Revenue?

What are the disadvantages of increasing indirect taxation? Think about price effects and the unequal burden of taxation.

Reduce the level of VAT to 10%.

What are the effects on the income groups used previously?

1)

2)

3)

What would be the effect on government revenue?

What problems could result from a reduction in the level of VAT? Again think in terms of the effect on aggregate demand.

Benefit Changes

Before completing the BYO Chancellor exercise look at the Department for Work and Pensions site (http://www.dwp.gov.uk/lifeevent/benefits/index.asp) to discover more about benefits given by the government.

What is income support?

Increase the level of income support by 20%. Who benefits from these changes?

Who qualifies for income support and how are the payments calculated?

What other benefits are available to those on low income?

Income Distribution

The question of how societies resources are distributed affects the level of social welfare. Unequal distribution of income can be seen as market failure. There are two broad ways in which the government can lessen inequality:

Fiscal Methods- taxation and benefits

Market Regulation- minimum wage regulation, discrimination policies

Fill in the table below with the economic effect of each policy:

You may like to consider each of the following:-

• the effect on unemployment
• the effect on aggregate demand and supply
• the effect on the distribution of income

The Rowntree report (http://www.jrf.org.uk) in 1995 examined what had happened to the income distribution over time. From the Social Policy search find reports on poverty, wealth and income distribution.

What has happened to the distribution of income in the 80's and 90's?