khaxx
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I'm doing some causal chains for discretionary fiscal policy and I'm a bit stuck. What would decreasing VAT do? Does it increase disposable or discretionary income??

Also what would increasing income tax, corporation tax and VAT do?
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robotico2014
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(Original post by khaxx)
I'm doing some causal chains for discretionary fiscal policy and I'm a bit stuck. What would decreasing VAT do? Does it increase disposable or discretionary income??

Also what would increasing income tax, corporation tax and VAT do?
If you look at the definitions of all terms VAT, disposable and discretionary income, you would easily understand.
For example, according to the Europa EU website VAT is defined as " a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services."
- Disposable income is the amount of available income after taxes have been taken away (e.g. income tax, NI (UK) and other direct taxes)
- Discretionary income is the available income after all the payments necessary to meet current essential bills have been subtracted (such as rent, insurance, food, transport, heating).

Therefore:
- if VAT increases then Discretionary income would decrease as per theory above ( the opposite is valid)
- If Income tax increases then Disposable income decreases as per theory above ( the opposite is valid)
- In the case of corporation tax, it depends more on the business and how they will distribute the extra available profits (resulted from a corporation tax decrease) or less profits (in the case of an increase of corporation tax). It does not affect disposable income and discretionary income directly, but if the company decides it could pay its employees more as well as charge less for its products. So depending on the fiscal policy, it could either benefit or disadvantage both consumers and employees.

Hope this helps.
Last edited by robotico2014; 3 days ago
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khaxx
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(Original post by robotico2014)
If you look at the definitions of all terms VAT, disposable and discretionary income, you would easily understand.
For example, according to the Europa EU website VAT is defined as " a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services."
- Disposable income is the amount of available income after taxes have been taken away (e.g. income tax, NI (UK) and other direct taxes)
- Discretionary income is the available income after all the payments necessary to meet current essential bills have been subtracted (such as rent, insurance, food, transport, heating).

Therefore:
- if VAT increases then Discretionary income would decrease as per theory above ( the opposite is valid)
- If Income tax increases then Disposable income decreases as per theory above ( the opposite is valid)
- In the case of corporation tax, it depends more on the business and how they will distribute the extra available profits (resulted from a corporation tax decrease) or less profits (in the case of an increase of corporation tax). It does not affect disposable income and discretionary income directly, but if the company decides it could pay its employees more as well as charge less for its products. So depending on the fiscal policy, it could either benefit or disadvantage both consumers and employees.

Hope this helps.
Thank you so much!!! Legend
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