AQA GCSE Economics: UK government revenue, spending and types of tax (8136) – Revision Notes

These are condensed notes for AQA GCSE Economics (8136), specification for first teaching from September 2017, section 3.2.1.2 Government income and expenditure (part of 3.2.1 within “How the economy works”). Full explanations and longer worked examples are in the study guide. Test yourself with the practice questions. Other links: AQA GCSE Economics hub, printable checklist, free diagnostics, and the short definitions page. All numbers below are invented for illustration.

1. Sources of UK government revenue

Source	Type	Note
Income tax	Direct	On earnings; usually progressive
National Insurance contributions	Direct	On earnings, paid by employees and employers
Corporation tax	Direct	On company profits
VAT	Indirect	Added to prices of many goods and services
Excise duties	Indirect	Fuel, alcohol, tobacco
Council tax, business rates, stamp duty	Mixed local and property taxes	Linked to property
Other		Capital gains tax, inheritance tax, fees and charges

• Income tax, National Insurance and VAT are among the largest sources in the UK.
• Borrowing is not revenue from taxes. It fills the gap when spending is greater than revenue.
• Revenue minus spending: negative is a deficit, positive is a surplus.

2. Areas of UK government spending

• Social protection (pensions and benefits)
• Health
• Education
• Defence
• Public order and safety
• Transport
• Debt interest
• Other (housing, environment, running costs)

Social protection, health and education are among the largest. Debt interest is money for past borrowing, so it buys no new service. Every choice has an opportunity cost: more on one area means less on another, or higher taxes or borrowing.

3. Direct versus indirect

	Direct	Indirect
Tax on	Income, profit, wealth	Spending
Burden falls on	The person or firm taxed	Usually the consumer, via price
Examples	Income tax, corporation tax, National Insurance	VAT, excise duties

Test: can the payer pass the tax on to someone else? If yes, it is indirect.

4. Progressive and regressive

• Progressive: percentage of income paid rises as income rises.
• Regressive: percentage of income paid falls as income rises.
• Always compare tax / income x 100 at two incomes. Total pounds paid tell you nothing about the type.
• Direct and indirect is a separate pair of labels. Income tax is direct and usually progressive. Fuel duty is indirect and can be regressive.

5. Method boxes

Method: income tax by bands

1. Find the slice of income in each band.
2. Multiply each slice by its rate.
3. Add the amounts for total tax.
4. Divide by income and multiply by 100 for the average rate.
5. Subtract tax from income for take-home pay.

Method: price including a sales tax

• Tax added: price before tax x (1 + rate).
• Tax taken out: price with tax / (1 + rate) gives price before tax. Tax = difference.

Method: share of a total

• Share = item / total x 100. Check that shares add to about 100%.

6. Worked reminders

Income tax bands (Country G, fictional): 0% on the first 13,000; 30% on 13,000 to 38,000; 50% above 38,000.

Income	Working	Tax	Average rate
12,000	below allowance	0	0%
28,000	15,000 x 0.30	4,500	16.1%
46,000	25,000 x 0.30 + 8,000 x 0.50 = 7,500 + 4,000	11,500	25.0%
90,000	7,500 + 52,000 x 0.50 = 7,500 + 26,000	33,500	37.2%

Each average rate is higher than the one before, so the tax is progressive.

Fixed charge: a fictional weekly fee of 10 on every adult. Over 52 weeks that is 520. For a person earning 16,000: 520 / 16,000 = 3.25%. For a person earning 80,000: 520 / 80,000 = 0.65%. The share falls as income rises, so the charge is regressive.

Tax in a price: a good is priced at 90 including 20% VAT. Before tax: 90 / 1.20 = 75. Tax: 15.

Deficit: revenue 500, spending 540. Deficit = 540 - 500 = 40.

7. Chains of reasoning to learn

• Raise fuel duty, then fuel prices rise, then low-income households lose a larger share of income, so inequality may widen. The government gains revenue, but the policy may conflict with an objective to reduce inequality.
• Raise the top income tax rate, then higher earners keep less of each extra pound, so some may work less or avoid tax. Revenue may rise by less than expected, but inequality may fall.
• Raise tax on a harmful good such as tobacco, then price rises and quantity demanded falls, so health may improve and revenue rises. If demand is inelastic, revenue rises more and consumption falls less.
• Spend more on health, then there are fewer funds for other areas, unless taxes or borrowing rise. Higher borrowing leads to higher debt interest later.

8. Exam-style reminders

Command words. “State” needs a named item only. “Explain” needs a point plus a reason, for example: fuel duty is regressive because the same amount per litre takes a larger share of a smaller income. “Evaluate” needs points for and against, then a judgement that follows from them.

Progressive, proportional, regressive in one table (fictional taxes):

Income	Tax X paid	X as %	Tax Y paid	Y as %	Tax Z paid	Z as %
20,000	1,000	5.0%	2,000	10.0%	3,000	15.0%
50,000	4,000	8.0%	5,000	10.0%	4,000	8.0%

Tax X is progressive (5% rises to 8%). Tax Y is proportional (10% at both). Tax Z is regressive (15% falls to 8%). Notice that Z takes 4,000 from the higher income and only 3,000 from the lower one. The higher income pays more pounds, yet the share falls, so Z is still regressive.

Who gains from a tax cut? If the lowest band rate falls, everyone whose income reaches the top of that band gains the same amount, while those inside the band gain less. A cut in the top rate helps only those above the top threshold.

Revenue versus spending questions. Check the data first. Add each column to find totals, calculate the gap, then state deficit or surplus. Do not call a deficit “debt”: the deficit is the gap in one year, and the national debt is the total built up from past borrowing.

Must-know distinctions

• Revenue versus spending: revenue is what the government receives, spending is what it pays out.
• Deficit versus national debt: a deficit is a one-year gap, while the national debt is the total owed from past borrowing.
• Direct versus indirect: whether the taxpayer can pass the tax on.
• Progressive versus regressive: how the percentage of income paid changes as income rises.
• Average versus marginal rate: tax divided by income, against the rate on the next slice of income.
• Tax versus charge: a tax is compulsory, whereas a charge such as a licence fee may be tied to a service.
• Transfer spending versus service spending: pensions and benefits move money to households, while health and education pay for services.

9. Quick self-test

1. Name three direct taxes.
2. Name two indirect taxes.
3. Is borrowing a source of tax revenue?
4. A tax takes 8% of a 20,000 income and 12% of a 60,000 income. Progressive or regressive?
5. A good costs 40 before a 20% sales tax. Price paid?
6. A price of 90 includes 20% VAT. How much is the tax?
7. A person earns 28,000 under Country G’s bands. What is the average rate?
8. State two main areas of UK government spending.
9. A government collects 500 and spends 540. State the deficit.
10. Why can VAT take a bigger share of a low income?

Answers

1. Income tax, corporation tax and National Insurance contributions.
2. VAT and excise duties such as fuel duty.
3. No. Borrowing is a way to cover a deficit, and it adds to the national debt.
4. Progressive, because the percentage rises.
5. 40 x 1.20 = 48.
6. 90 / 1.20 = 75 before tax, so tax = 15.
7. 4,500 / 28,000 = 16.1%.
8. Any two from social protection, health, education, defence, public order and safety, transport, debt interest.
10. A low-income household spends most of its income on goods that carry VAT, while a high earner saves or buys untaxed items, so the VAT bill is a bigger fraction of the smaller income.

10. Where marks are usually lost

• Judging progressive or regressive by the amount paid instead of the percentage of income.
• Charging the highest rate on every pound of income instead of only the slice in that band.
• Dividing a tax-inclusive price by the wrong figure, or taking 20% off it.
• Listing borrowing as a tax, or national debt and deficit as the same thing.
• Giving only a definition in an “explain” answer, with no developed chain of reasoning.
• Giving an evaluation with no judgement, or a judgement that does not follow from the points made.
• Giving a general answer such as “tax goes on services” when asked for a named area of spending.
• Quoting a made-up “real” figure when the question gives data to use.

Official syllabus

AQA GCSE Economics (8136), specification for first teaching from September 2017, published by AQA: section 3.2.1.2 Government income and expenditure.