Explain the different types of taxation, making sure that you define each properly and comment on their relative importance, and discuss how each can be used to influence economic growth.

Assignment Brief

7BUSS001W.2 Economics for Management end of unit coursework  (Semester 2 2018-19)

This assignment is worth 70% of the overall module mark

Q1: Taxation is the key component of any government’s fiscal policy. Explain the different types of taxation, making sure that you define each properly and comment on their relative importance, and discuss how each can be used to influence economic growth. For research purposes and contextual discussion, use the UK.

(50%)   

Q2: High unemployment is a scourge. Governments must make benefit payments and forego taxes, not to mention the psychological impact on the unemployed.

• For either Spain or Italy, research the nature of unemployment, i.e. where it is, who it is and how it has arisen. (30 marks)
• Suggest means for the alleviation of this unemployment, taking into account the overall economic circumstances of the country, which should be properly referred to. (20 marks)

(50%)

Total = 100%

Word count limit Q1: 1750

Word count limit Q2: 1750

Each answer should be in the form of a short report, therefore it should include an introduction and conclusion but an executive summary is not required. Any charts or graphs should be in the body of the report and not in appendices. References for each question should follow your answer to that question.

The answers should be fully referenced (referencing may be either Harvard or “footnotes” in Word). Please note that a large bibliography containing references that are NOT used in the text will lose marks.

Both questions require you to do your own research.

Sample Answer

Q1: Types of Taxation and Their Role in Promoting Economic Growth in the UK

Introduction

Taxation forms a fundamental pillar of fiscal policy. Through taxes, governments generate revenue to finance public services and infrastructure, influence consumption and investment decisions, and address income inequality. This report explains the main types of taxation, discusses their relative importance in the UK, and examines how each type can be used to influence economic growth.

1. Types of Taxation

Taxation is broadly categorised as direct and indirect taxes.

1.1 Direct Taxes

These are levied directly on income, wealth, or profits. The main types include:

1.1.1 Income Tax

• Paid by individuals on their wages, salaries, pensions, or investment income.

• In the UK, it is a progressive tax: higher earners pay a larger percentage.

• Importance: Income tax is the largest single source of government revenue (HMRC, 2023), and is vital for funding NHS, education, and welfare.

1.1.2 Corporation Tax

• Paid by companies on their profits.

• The UK’s main rate is currently 25% (as of 2024), with a lower rate for small businesses.

• Importance: Encourages or discourages investment depending on rate changes.

1.1.3 Capital Gains Tax (CGT)

• Applied to profits from the sale of assets (e.g. property, shares).

• CGT promotes equity in taxation by targeting wealth, though it brings in relatively lower revenue.

1.1.4 Inheritance Tax

• Levied on estates passed on after death.

• Often debated for fairness and revenue yield; contributes less than 1% of total tax revenue.

1.2 Indirect Taxes

These are imposed on goods and services rather than income or profits.

1.2.1 Value-Added Tax (VAT)

• A consumption tax added to most goods and services at a standard rate of 20%.

• Importance: One of the largest contributors to UK revenue.

• Regressive in nature; disproportionately affects lower-income households.

1.2.2 Excise Duties

• Target specific goods like tobacco, alcohol, and fuel.

• Serve dual purposes: raising revenue and discouraging harmful consumption.

1.2.3 Customs Duties

• Levied on imports.

• After Brexit, customs duties gained importance as the UK formed its own trade policy.

2. The Importance of Different Tax Types in the UK

Source: HM Treasury Budget 2023

3. Taxation and Economic Growth

Different taxes influence economic behaviour in unique ways. Governments can use taxation strategically to stimulate or slow down economic growth.

3.1 Income Tax and Labour Supply

• Reductions in income tax can encourage work and boost consumption, supporting growth.

• However, too much reduction may limit public service funding and lead to deficits.

3.2 Corporation Tax and Investment

• Lower corporation tax attracts business investment.

• The UK maintained competitive corporate tax rates post-Brexit to retain multinational companies.

• However, evidence on whether cuts directly lead to higher growth is mixed (OECD, 2023).

3.3 VAT and Consumer Spending

• Raising VAT can reduce demand but increase government revenue.

• During economic slowdowns (e.g. COVID-19), temporary VAT reductions can encourage spending.

3.4 Excise Duties and Externalities

• Used to address market failures (e.g. pollution).

• Encouraging green energy through carbon taxes promotes sustainable growth.

3.5 Redistributive Impact

• Progressive taxation (e.g. income tax, inheritance tax) reduces inequality, which in turn supports long-term, inclusive economic growth.