Lesson 4.5.2

4.5.2 Taxation Quiz: Pearson Edexcel Economics A, Unit 4

20 questions

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Lesson 4.5.2, Taxation: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 4: Theme 4: A global perspective, written with Revision Ninja.

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The 20 questions

  1. Which best describes a progressive tax?

    • A tax paid only by businesses on their profits, with no tax applied to households at any income level
    • A tax whose average rate rises as income rises, so higher earners pay a larger proportion of their income
    • A tax whose average rate falls as income rises, so lower earners pay a larger proportion of their income
    • A tax that takes the same proportion of income from every household, regardless of how much it earns

  2. Which best describes a regressive tax?

    • A tax whose average rate rises as income rises, so higher earners pay a larger share of their income in tax
    • A tax that is paid only by high earners and not by any household with a low level of income in the economy
    • A tax whose average rate falls as income rises, so lower earners pay a larger share of their income in tax
    • A tax that takes the same proportion of income from every household, so the rate never changes with income

  3. Which is an example of a proportional tax?

    • A tax on basic goods that takes a fixed amount per item regardless of the price of the good or the buyer's income
    • A tax on wealth that applies only to households whose assets are above a high threshold in the economy
    • A graduated income tax, where the rate increases in bands as income rises through the scale
    • A flat rate income tax, where everyone pays the same percentage of their income

  4. A household earning £10,000 pays £3,000 in tax. A household earning £40,000 pays £8,000. Which type of tax is this?

    • Progressive, since the higher-income household pays more tax in total than the lower-income household
    • Progressive, since the higher-income household pays a larger absolute amount of tax than the other household
    • Proportional, since both households pay the same percentage of their income as tax in the year
    • Regressive, since the average rate falls from 30 per cent to 20 per cent as income rises

  5. What is the likely effect of a rise in the income tax rate on incentives to work?

    • It always increases the incentive to work, because people work harder to pay for the higher tax bill
    • It may reduce the reward from extra work, which can discourage some people from supplying labour
    • It has no effect on work, since people's decisions about working depend only on their family circumstances
    • It always raises the number of hours worked by all people in the economy, since higher tax means more labour

  6. What does the Laffer curve illustrate?

    • The relationship between interest rates and investment, showing that investment always falls as rates rise
    • The relationship between tax revenue and the level of inflation, which always rises together in a straight line
    • The relationship between tax rates and tax revenue, with revenue rising to a point and then falling as rates rise further
    • The relationship between exchange rates and the trade balance, showing that trade improves as the currency falls

  7. Which effect of a higher income tax rate on the labour market is captured by the Laffer curve?

    • Higher tax rates always increase labour supply and total tax revenue without limit in every economy
    • Higher tax rates always raise the price of labour, so that employers hire more workers in every period
    • Tax rates have no effect on labour supply, because workers never respond to changes in their take-home pay
    • Very high tax rates can reduce work effort and tax bases enough that total revenue falls

  8. How can a rise in direct progressive taxes affect income distribution?

    • It has no effect on income distribution, since tax changes affect only the total level of income, not its spread
    • It always increases income inequality, because the rich always avoid tax and the poor always pay the most in tax
    • It can reduce income inequality by taking a larger share of income from higher earners
    • It raises the incomes of the poorest households directly, because all tax revenue is returned to them in equal amounts

  9. What is a likely effect of an increase in indirect taxes on the price level?

    • A one-off rise in the price level, as taxes raise the prices of goods and services bought by consumers
    • A continuing fall in prices each year, because higher indirect taxes always reduce the cost of production
    • No effect on prices, since indirect taxes are paid by producers and never passed on to consumers in any way
    • A permanent fall in the price level, since indirect taxes always reduce demand for goods in the economy

  10. A cut in corporation tax is likely to have which effect on foreign direct investment?

    • It always discourages FDI, since lower taxes make a country less attractive to foreign investors in every case
    • It may encourage FDI inflows, since the after-tax return on investment in the country becomes higher
    • It has no effect on FDI, because multinational firms never consider tax rates when they decide where to invest
    • It leads to a permanent fall in FDI, because lower tax revenue forces government to cut infrastructure spending

  11. Which is an effect of a rise in direct taxes on aggregate demand?

    • A permanent rise in the trade balance, because higher taxes always reduce imports by the same proportion
    • Lower disposable income can reduce consumer spending, which tends to reduce aggregate demand in the economy
    • No effect on aggregate demand, since consumer spending depends only on interest rates and never on income
    • Higher aggregate demand, because households respond to taxes by spending more to offset the higher tax bill

  12. Which statement best evaluates a shift from direct to indirect taxation?

    • It always raises the incomes of the poorest households, because indirect taxes are paid only by the richest households
    • It has no distributional effect, since indirect taxes and direct taxes always fall on the same households equally
    • It may raise revenue from consumption, but it can be regressive, since poorer households spend a larger share of income
    • It always reduces inequality, since indirect taxes are always progressive and fall more on the richest households

  13. Which of these taxes is most likely to be regressive?

    • A flat tax on household energy bills, which takes a larger share of income from lower-income households
    • A progressive income tax with rising rates for higher earners, which takes a larger share from the rich
    • A tax on very high incomes paid only by the top 1 per cent of earners in the economy each year
    • A tax on large inheritances that falls only on the wealthiest families and is paid by few people overall

  14. Which of these is an example of an indirect tax?

    • Value added tax charged on goods bought in shops
    • National insurance contributions paid by employees on their earnings each pay period in the year
    • Capital gains tax paid by investors on profits made from selling shares at a higher price
    • Income tax deducted from wages through the pay-as-you-earn system each month for workers

  15. Income tax is 20 per cent on the first £12,000 of income and 40 per cent above that. A person earns £30,000. What is their average rate of tax?

    • 32 per cent, since tax = 2,400 + 7,200 = 9,600, and 9,600 / 30,000 = 0.32
    • 24 per cent, since the average of 20 and 40 per cent gives the average rate for the individual
    • 40 per cent, since the top marginal rate applies to the whole of income in every case
    • 20 per cent, since the basic rate applies to the whole of income whatever the level of earnings

  16. A cut in indirect taxes on basic food is likely to have which effect on consumers?

    • Higher prices of basic food, because the tax cut reduces the supply of food to consumers in the economy
    • No change in prices, since indirect taxes on food never affect the price that shoppers pay at the till
    • Lower prices of basic food, which raises the real income of households and their spending power
    • Lower take-home pay, since indirect tax cuts always reduce the wages paid to employees in food industries

  17. A rise in income tax would most directly reduce which variable for households?

    • The trade balance, since income tax is recorded as a flow of exports from the household sector each year
    • The level of public spending, since households are required to fund all government spending from their own pockets
    • The price of basic goods, since income tax is charged on each good that households purchase in the shops
    • Their disposable income, which is income left after direct taxes have been paid

  18. Why might a rise in direct taxes reduce a country's imports?

    • Direct taxes increase imports, because households spend the tax they save on foreign goods and services
    • Lower disposable income reduces households' demand for imported goods as well as domestic goods
    • Direct taxes have no effect on imports, because imports are determined only by the exchange rate each year
    • Direct taxes raise the price of imports directly, so households choose domestic goods instead of foreign ones

  19. Which is an argument for funding redistribution mainly through income tax rather than a flat sales tax?

    • Income tax is always paid at the same rate by all households, which makes it more effective at reducing inequality
    • Income tax can be set progressively, so it can take a larger share of income from higher earners
    • Income tax has no effect on income distribution, while sales taxes always reduce inequality in every economy
    • Sales taxes are progressive by law, so they take a larger share from the highest earners than income tax does

  20. Which is the best evaluation of the claim that lower taxes always raise economic growth?

    • Lower taxes never affect growth, since growth depends only on the population size and the stock of natural resources
    • The effect depends on incentives, the quality of spending and the state of demand, so the link is not automatic
    • Lower taxes always raise growth in every country, because incentives always rise without any other effect on the economy
    • Lower taxes always reduce growth, because the government then has less money to spend on investment in any case

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