Name : Thea Cassius Fernandez

Class : 10-D

(a) Define ‘indirect taxes’ and give an example. [2]

(b) Discuss whether a government should increase taxes on food. [8]

(a) Indirect taxes are taxes that can be passed on to another entity or individual. It is taken from
income when the money is spent on goods and services, which is why they are also called
expenditure taxes.
For example, goods and services tax (GST) is an indirect tax.

(b) Taxes are compulsory payments made to the government by all people in an economy.
The government shouldn’t increase taxes on food. Food is a necessity, which makes it inelastic.
This means that buying food will take up more of the income of the poor people, and they won’t
have enough money to buy sufficient food. With lesser money, they will be unable to pay for
other necessities that they require to live with decent living standards. This increases poverty
which reduces the overall living standards of the country.

On the other hand, the government should increase taxes on food. Since food is a necessity, it is
an inelastic good. This way, people will have to buy the food regardless of the tax, making it a
good source of taxation and also increasing the government revenue. This gives the government
more ability to spend to help macroeconomic aims and fulfil responsibilities. For example, they
may choose to spend more on public education or street lights.
Also, if less food is bought at higher prices it will hold more value. People will be more inclined
to finish it, reducing food waste and improving the environment.
The increase in taxes would also reduce obesity which helps to create a more healthy population.
This is beneficial as it provides a better capacity for an efficient working population.

In conclusion, increased taxes would help to improve the general health of the public - directly
due to healthy/controlled food consumption, and indirectly due to the revenue raised that can be
spent by the government on a range of health benefits (better health care facilities, hospitals in
less developed areas, etc). This benefits the country as a healthy population can be used to fulfil
the macroeconomic aim of full employment. On the contrary, the government shouldn’t increase
taxes because it is unfair if low-income population cannot afford to buy the basic necessity of
food, which increases income inequality (the opposite of one of the macroeconomic aims).
Regardless of the benefits, increased food taxes is unadvisable because it would cause more riots,
and more deaths in low-income houses which negatively affects the working population for
unskilled tasks, and because it is unfair.

(a) Identify two reasons why governments impose taxes. [2]

(a) Governments impose taxes to raise revenue and to discourage the production/consumption of
demerit goods (such as cigarettes, alcohol, etc).
Name : Thea Cassius Fernandez
Class : 10-D

(b) Discuss whether a decrease in government spending will benefit an economy. [8]

(b) Government spending is defined as money spent by the public sector on the acquisition of goods
and provision of services such as education, healthcare, social protection, and defence.

A decrease in government spending may not benefit the economy.

For example, a decrease in government spending on public merit goods/services such as
education and healthcare will lower living standards. These are goods/services that low-income
households may not be able to afford, which increases poverty.
Additionally, lower government spending on education will create an unskilled population. To
elaborate, less education will reduce the skills of the children. This means that there will be no
skilled labour in the future, which leaves room for inefficiency, a majority of low-wage jobs,
lower output and less labour productivity which has a negative impact on the output of the
country, and inevitably reduces the GDP of the country.
The decrease in government subsidies will discourage new businesses from starting, which
reduces supply and demand, ultimately decreasing economic activity.

On the other hand, lesser government spending could prove to be beneficial to the economy.
For example, lesser public spending will promote economic activity. This can be done by
reducing taxes. This raises the incentive to work as labour will not be demotivated by direct taxes
cutting out their income (they will have higher disposable income). This increases demand and
supply in the market which increases output and boosts GDP.
If the government spending reduces, it reduces the total demand and reduces inflation (which
achieves the macroeconomic aim of low inflation).

To conclude, a decrease in government is likely to not favour the economy (especially in the long
term) because it lowers living standards and discourages economic growth of the country in the
future - due to lack of education, poor healthcare provision, bad infrastructure and more. Such
factors could lead to a country with lots of poverty and very low living standards. While there are
benefits to less government spending (such as more output, motivated workers, lesser inflation),
the risks of the negatives are very impactful and harmful for the future of the country (and
ultimately outweigh the benefits).