IGCSE Economics Paper-2: Specimen Questions with Answers 65 - 65 of 100

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Passage

“In developing countries, in contrast, inflation is not purely a monetary phenomenon. Factors typically related to fiscal imbalances, driving higher money growth and exchange rate depreciation, dominate the inflation process in developing countries.”

Question 65 (4 of 5 Based on Passage)

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Short Answer▾

what do you mean by tax incentive?

Explanation

  • A tax incentive refers to the way a country՚s tax code is designed to provide incentive or encourage and promote an economic activity by decreasing the tax rates for a company in the said country.
  • Taxes can affect both demand and supply factors by an influence on incentives. A Reduction in the marginal tax rates on wages and salaries can cause people to work more to maintain the level of income. Increasing the earned income tax can be reason to bring more low-skilled workers into the labor force. Lower marginal tax rates on the returns to assets (such as interest, dividends, and capital gains) on the other hand can encourage savings among labors.
  • In case of companies a reduction in the marginal tax rates on income can shift the investment of some companies to domestic rather than abroad. Tax breaks for research can lead to the generation of new ideas that to help the economy grow.
  • However, tax reductions can also have negative supply effects. If a tax cut increases workers income after charging tax, some workers may want to work less over more leisure. This “income effect” will push against the “substitution effect,” in which lower tax rates increases the financial reward of working at the margin.
  • Tax provisions can also distort how investment capital is used. For example- The current tax system, is in the favor of housing investment rather than other type of investment. That difference likely induces excess investment in housing reducing economic output and social welfare.
Tax Avoidance and Evasion

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