The Government's Role in the Economy

Government Policy Objectives

Sustainable Economic Growth

• Stable economic growth that can be sustainable over the long term (maintained for future generation)
• Economic growth refers to the growth in the production capacity over time
• Estimated target range: 3-4% GDP growth rate per annum

Price Stability

• Where prices are stable and not fluctuating.
• Requires low inflation rate
• Target range: 2-3% rate of inflation per annum

Full Employment

• Refers to when everyone who is willing and able to work can find employment
• This means that cyclical unemployment is zero
• A person is considered to be employed when they are willing and able to work and in paid work for at least an hour a week
• Estimated target: 4.5% rate of unemployment

Equitable Income Distribution

• Promotion of the welfare of all Australians
• Achieved through measures to improve vertical equity like the progressive tax system
• Target: No target

Efficient Allocation of Resources (Taken out of Course)

• Where resources are allocated to their most efficient use (Ensuring more even distribution of the economic pie)
• Government achieves this through measures like:
  • Direct provision of services like nation defence…

Taxation

Key Concepts:

• Impact: Where the tax is levied or collected
• Incidence: Where the burden of the tax falls
• Specific Tax: Charged on the volume of sales regardless of price
• Ad Valorem (Value added tax): Levied as a percentage of price
  • E.g. Real estate or personal property

Direct Taxation

• Collected from the taxpayer’s income (Individual or corporate)
  • Impact and incidence falls on the same person

Indirect Taxations

• Impact and incidence fall on different people
  • E.g. excise tax or GST

Progressive Tax

• Increasing proportion of tax as income increases
  • Burden mainly falls on those who earn higher levels of income

Regressive Tax

• Decreasing proportion of income taxed as income increases
  • Greater burden on lower income earners
  • E.g. Excise tax: Low income earner will be taxed a higher proportion of their income
  • E.g. GST: Everyone pays 10% tax so burden falls more on low income earners

Proportion Tax

• Constant proportion of income
  • E.g. Australia company tax: 30% for big companies and 27.5% for small

Types of Taxes

• Income
• Goods and Services
• Property and Wealth

Income

Personal Income Tax ¹

• Levied on all wage and salary income
• Direct
• Progressive Burden

Company Tax

• Proportional Tax
• Impact on individual companies
• Incidence: Fall on consumers as cost is passed on

Fringe Benefits Tax

• Levied on the value of non-cash benefits given to employees in addition to their salary or wage
• E.g. Company cars, school fees for children

Goods and Services

GST

• Broad based tax levied at 10% of the price of most goods and services
• Impact on seller
• Incidence on consumer
• Revenue collected by the federal gov and distributed to state government

Excise Duty

• Imposed at a flat rate on domestically produced goods such as alcohol cigarettes, oil products
• Revenue raising
• Levied on price inelastic goods
• Reduce externalities

Customs Duty

• Indirect tax levied on imported goods (i.e. a tariffs)
• Means of protecting Australian producers from o/s competition

Property and Wealth

Capital Gains Tax

• Progressive tax which is levied on capital gains (profit) from the sale of assets held for a period longer than 12 months
• Adjusted for inflation
• Applies to shares, investment properties and some personal items if they were purchases with the intention of resale (e.g. jewellery)

Resource Tax (Not important)

Resource Rent Tax

Carbon Tax

Emissions Trading Scheme (ETS)