Evaluate the pros and cons of an income tax and consumption tax
Tax is a payment compulsorily collected from individuals or firms by central or local government (John Black, 2003). It is a concept many of us despise because directly or indirectly we face a burden we would rather not encounter. Tax is probably the government’s greatest weapon, the best way of understanding it is to realise the government needs to obtain money one way or another in order to pursue other economical goals. Supporters for replacing the income tax with a consumption tax argue that efficiency, equity, and administrative simplicity would be enhanced. The advocates of the income tax have argued that the case for personal consumption taxation is seriously flawed (Rosen, H.S. and T. Gayer, 2008). The debate between whether an income tax or consumption tax policy can be understood by “a robber who promises to stop coming through your front door if you promise to leave the back door open” (Llewellyn H. Rockwell, Jr, 2002), so it is the government that promises to stop taxing your income if you let it tax your consumption instead. This essay will look to make a modest attempt to summarise a particularly broad topic of income tax and consumption tax with their pros and cons.
Joseph E. Stiglitz (2000) writes about the five principles of taxation; efficiency, administrative simplicity, flexibility and the fairness (equity) of taxation. The main issues of income or consumption tax are circulated around efficiency and equity. A key pro consumption tax arguably has over income tax is it is fairer to tax an individual based on what they take out of society (consumption), rather than what they contribute to society (their respective incomes). Those supporting an income tax would argue that an individual with an abundance of wealth could consumer little or nothing at all compared to a poorer individual whose consumption is higher, which results in a smaller tax liability. An alternative view of this is that it is actually a benefit to society if a wealthy individual chooses to consume so little because the “resources he or she saves become available to the society for capital accumulation” (Rosen & Gayer, 2008). Related to this there is a criticism that income tax is inequitable because it taxes capital income twice, once when the income is earned and the second time when it is invested and there is a return on the investment. Therefore, an income tax provides a disincentive for human capital investment (Yu Zhu, 2009). This is deemed to be a disadvantage of income tax however whether this is fair or not does depend on value judgements.
The general view presented by many is that consumption tax is fairly regressive in its distribution, which can only be seen as a disadvantage of the consumption tax. Like mentioned before, it is believed that a wealthier person will pay a far lower proportion in tax than those who are poorer because those with the highest level of incomes spend a smaller proportion of their incomes. There are several arguments proposed against this. A key argument being is that taxing consumption can be equated to taxing lifetime income so they bear the same exactly the same tax burden. “There is reasonably strong evidence that the proportion of life-time income devoted to consumption is about the same at all levels” (Rosen & Gayer, 2008). Other arguments presented are related to tax incidence and the tax base. It is debateable whether the effects of consumption have any effect on the distribution of income and some argue that progressivity or regressivity should be judged by measuring tax payments relative to the appropriate tax base. Although, alternatively a sales tax is deemed to be a form of consumption tax, and they are widely viewed to be regressive. Sales taxes are imposed on only a portion of consumption, and the proportion represents a smaller fraction of those with higher incomes levels overall consumption than of those with lower-income levels (Joseph E.Stiglitz, 2000). It is fair to say that the income tax is fairly progressive because as the taxable amount increases, so does the tax rate. This presents a reasonable advantage for income tax. Over the years income tax has been fairly successful in raising large amounts of revenue with a moderately progressive tax system. In 2005, almost 174 million income tax returns were filed, which generated $972 billion in revenue, about 45% of federal revenues (Rosen & Gayer, 2008). However, a highly progressive income tax system may cause tax evasion (Yu Zhu, 2009). Those with very high level incomes may try to avoid tax by participating in the underground economy.
More advantages of income tax, which are fairly obvious, are that it is deemed that direct means of redistribution meet the two equity objectives of horizontal and vertical equity (Yu Zhu, 2009). The theory of horizontal equity states that those with a similar ability to pay, should pay the same amount in taxes. Also the theory of vertical equity suggests those who are better off should pay more taxes. Taxing capital income is central to a fair tax system because those with higher capital income appear to have a higher ability to pay (David A.Weisbach, 2006). It is key to remember the fundamental purpose of taxation is to finance public benefits. Hence, those with higher incomes have the ability to pay more in taxes than those with lower incomes and therefore should pay more.
The efficiency implications of personal income tax and consumption tax are related to labour supply and saving. If we create a model where an individual’s labour supply is fixed and two commodities the individual purchases are present (pC) and future consumption (fC) . The example below will show the model representing the effects of consumption and income tax. With interest rate (r), every additional pound of consumption today means that the individual’s future consumption is reduced by 10 +r. Hence, the relative price of present consumption is 10 +r (Rosen & Gayer, 2008). Now a 20 per cent tax is imposed on Bob, who decides to save 10 pounds, which then earns an interest of r. The government taxes 20% of this return, leaving Bob with 0.8 x r. If Bob decided to borrow 10 pounds instead, with deductible interest payments, the cost of borrowing is reduced to 0.8 x r. The income tax reduces a reduction in the relative price of present consumption from 10+r to 10+0.8. So an income tax generates an excess burden (Rosen & Gayer, 2008). A consumption tax wouldn’t affect the rate of return on Bob’s savings. Unlike the income tax there is no excess burden when a consumption tax is imposed. Hence, a consumption tax removes the disincentive to save, whereas an income tax discourages savings. This is cited as a main advantage of consumption tax and a big negative for income tax.
Another con for consumption tax is that it does distort the rate at which an individual can trade off leisure against consumption. It is not clear that taxing all commodities at the same rate is efficient. Suppose we have an individual whose wage rate is w. Before the consumption tax, they can trade off one hour of leisure for w pounds worth of consumption. If consumption is taxed at the rate T, however, surrendering one of leisure allows them only w/(1+t) pounds’ worth of consumption. Thus, the consumption tax distorts the decision between leisure and consumption. (Rosen & Gayer, 2008)
An income tax discourages savings and consumption tax does not, both taxes distort the labour supply decision. We cannot conclude that a consumption tax is more efficient based on the principle that it only distorts one market instead of two. Both income and consumption tax create an efficiency cost. Nonetheless, most studies indicate that given what is known about labour supply and saving behaviour, “a consumption tax creates a smaller excess burden than an income tax, even when labour supply distortions created by both taxes are taken into account” (Rosen & Gayer, 2008).
To conclude I must say that it is very important to bear in mind the debate between consumption tax and income tax is one of theory against something that already has been implemented in real life. When reality is introduce into the debate, the case for taxing capital income is stronger than the case for taxing consumption (Martin J. McMahon Jr, 2006). However, other disadvantages that weren’t mentioned for income tax include doctors and other highly qualified workers to emigrate to low-tax countries and high administrative costs. Consumption tax also has similar administrative costs due to increased monitoring and accounting costs. Consumption taxes also possess transitional issues. These issues can be discussed more widely but hopefully this essay has helped a long way into understanding the pros and cons for both consumption tax and income tax. For a broad argument like this, it is very unlikely that a consumption tax or income tax will be regarded as the most “equitable” or “efficient” tax system anytime soon.
Consider the role of liquidity and its provision in a financial system. What happens when liquidity supply is disrupted?
Liquidity is a key concept not just in the financial aspect of economics but in
economics as a whole. It is often defined as the property of assets, of being easily turned into
money rapidly and at a fairly predictable price. Apart from money itself, and deposits with
non-bank financial firms such as building societies, short-dated securities such as Treasury
bills are the main assets of this form. This is contrasted with illiquidity. Some assets are
illiquid because there are now markets on which they can be easily be traded, such as
unsecured loans to bank customers. Other assets are illiquid because while they can be traded,
the price that can be obtained may be hard to predict, especially if a quick sale is required.
This applies to shares in companies, or to houses (Black, 2002, pg272). This essay will look to analyse the role of liquidity and its provision in a financial system, as well as, discuss what happens when the supply of liquidity is disrupted.
The role of liquidity in a financial system is a significant one. An opening to obtain revenue is transparent due to indifferences in the rates of return of liquid and illiquid assets through arbitrage – by borrowing at the low rate of return of money (the liquid asset) while investing at the high rate of return of the illiquid asset (Champ & Freeman, 2002). Arbitrage is often regarded as making profits using rate-of-return differences. Fiat Money (financial term used for modern money) is valued higher because its liquidity is stronger than alternative assets. If these other assets were perfect substitutes for fiat money, consumers will only be attracted to the asset with the greater rate of return. In this case, the more attractive asset is fiat money because not only is it less costly to exchange than other assets, but also changes hands more regularly with speed (highly liquid and held for a shorter period of time) than other assets. The yield generated by fiat money, is less than the return on equity. Even so, a consumer with a saving nature chooses not to spend any of his portfolio, because, in the case that an opportunity arises to spend in the future, he will be liquidity constrained, and fiat money is more liquid than equity. The gap between the return on money and the return on equity is a liquidity premium (Kiyotaki & Moore, 2008).
Bruce Champ and Scott Freeman (2002) provide a simple adequate example in their textbook to illustrate the role of liquidity and its provision in a financial system in terms of an asset trade-off. A house will provide a much larger return in a long period of time than fiat money but in a short period of time there is no competition between the two. A house is probably an extreme case of transaction costs because they are so difficult to exchange. Costs incurred when a house is passed over are obviously greater than the costs incurred for fiat money exchange. Houses are not portable and cannot be transported.
This role of liquidity and its provision in the financial system can be presented using a simple example of time periods. Time can be divided into three separate periods to measure and explain an assets maturity along with the rate of return (Allen & Gale, 2007). The consumer can choose between a short-term, liquid asset and a long-term, illiquid asset and they are each represented by a constant-returns-to-scale. There is a trade-off between the two assets, as they both differ in the amount of time taken for them to mature. The return on the asset coincides with assets maturity. The long-term asset reimburses a higher rate of return but takes two time periods to mature. Whereas, the short-term asset takes only a single time period to mature but logically pays a lower return on the asset. The interpretation of this can be viewed as a long-term asset can be an annoyance for holding illiquid assets (Allen & Gale, 2007). Franklin Allen and Elena Carletti (2008) provide insight that Bryant (1980) and Diamond and Dybvig (1983) first introduced this model showing liquidity produce by banks. In this scenario, providing liquid insurance to the depositors is the main purpose of the bank.
Preferences in liquidity can be presented in a similar way to the time model previously mentioned. They can be regarded as key component in the role of liquidity in the financial market. An incident which changes ones preferences resulting in an unexpected urgent need for liquidity presents uncertainty about time preferences. This is called a liquidity shock. This shock can be caused an unplanned must to spend immediately, the unexpected opportunity to invest or an increase in the cost of expenditure. Using the same time index as before, where we divide time into three different periods, there is uncertainty in the consumers mind about the period in which he wants to consume. Consumption will only take place either in one of the first or second time period. Those who consumer early will only want to consume in the first time period and those who choose to consume later will only consume in the second period. Knowledge of information plays an important role in liquidity preferences. If the consumer had known he was an early consumer, he would invest only in the short-term asset regardless of the rate of return it yields. If the consumer knew that he was a late consumer, he would invest in the long-term asset because it gives a higher return. However, the consumer doesn’t possess this information and is uncertain whether he is an early or late consumer; he has to make a choice. The consumers’ risk aversion along with his liquidity preference and the yield an asset returns will determine his optimal portfolio (Allen & Gale, 2007). A point to note is that the rate of time preference is higher than returns yielded by money or equity. Quite simply, consumers spend their labour income as the periods go by. They choose to hold neither equity nor money. The uncertainty dilemma doesn’t apply to these consumes as they are not attracted to the return the assets generate, not because they don’t have access to the market and are not particularly confused about whether they are early or late consumers (Kiyotaki & Moore, 2008).
By acceptance of many around the world, liquidity played an important role in the recent economic crisis. Equally significant was the role of the bank’s in terms of liquidity. A bank’s liquidity has two interconnected but different aspects. First, its cash flow position and its ability to meet short-term needs by borrowing in the market, and, second, its capacity to meet any liquidity pressures by selling high quality assets (Chaplin et al, 2000).
The formation of the bank’s balance sheet defines its liquidity management. Funds are deposited by consumers into banks which can be withdrawn by them easily and quickly to fulfil their liquidity needs. This provision of liquidity gives banks the chance to hoard those deposits, which are then processed to be used as funds to lend to firms for long-term investment projects. There is a fine balance as to how the management of liquidity should be handled by the bank, so that they can meet the necessary liquidity requirements of their depositors and lend out money for opportunistic investment. This has to be managed with the consideration of uncertainty concerning liquidity requirements in mind. The uncertainty of these needs can be categorised into two types; the first of which is all individuals banks face idiosyncratic liquidity risk, where the need for liquidity may vary from more to less at any given time; and all individual banks face an aggregate liquidity risk where demand is varied for aggregate liquid in different periods (Allen & Carletti, 2008).
During the recent crisis, liquidity supply was disrupted due to aggregate liquidity risk being in high demand. Funds that had been directed to asset-backed securities by banks became available elsewhere. This caused an awkward adjustment period, during which, banks placed premiums on holding assets which were highly liquid; assets which could be easily converted into cash. The fall in yields of liquids assets such as government securities in all major economics was because of an increase in demand for liquid assets during the adjustment period. (King, 2007)
This leads to interbank lending system and its correlation with liquidity. A major role for the interbank market is to reallocate liquidity amongst banks that are subject to idiosyncratic shocks (Allen & Carletti, 2008). If banks hoard liquidity and as a result they are able to cover idiosyncratic shocks from their own back pocket, then it is unproblematic for them to be unwilling to offload some assistance to other banks. However if, on the other side of the coin, liquidity hoarding prevents the reallocation of liquidity to insufficient, but in credit banks, then the poorly operational interbank market is a problem meriting central bank liquidity provision (Allen & Carletti, 2008). The unexpected increased in demand for aggregate liquidity due to the adjustment period is a reason behind why interbank lending had been increasingly focused on short maturities in the recent crisis (King, 2007). This increased demand in liquidity also elevated the interbank lending rates. Due to this abrupt disruption in the liquidity supply, banks were forced to demand more reserves to manage and satisfy their routine payment requirements.
Bank runs are a natural outgrowth of economic fundamentals (Chaplin et al, 2000). It is the name of the process which had lead to a number of bankruptcies of financial institutions in the recent crisis. Banks create liquidity by issuing liquid deposit claims against illiquid loans. This if often termed as liquid creation. Thakor (1996) states that in a model formalised by Diamond and Dybvig (1983) in which the superiority of bank financing over financial market funding is due to the superior risk sharing provided by the bank. This could cause loyal depositors to prematurely withdraw their deposits because they believe the bank is, or is in the process of become insolvent. During a bank run, depositors are spurred on by the actions of others, as more people withdraw deposits, others will feel insecure about the bank’s capability to liquidate their funds, thus causing further withdrawals. This run on a bank is disruptive since the only way the bank can satisfy depositors’ demand is to liquidate loans (Thakor 1996). Again a disruption in the supply of liquidity causes panic in the bank and the threat of a bank run can often lead to bankruptcy.
In conclusion I would like to present my opinion that the topic of the role of liquidity and its provision in the financial system is a very broad one. There are a countless number of roles for liquidity and several different methods in which it can be provisioned in the financial system. In general terms, liquidity plays a humongous role in the financial system in terms of making banks tick. If financial markets are complete, the financial system provides liquidity efficiently in that it ensures that banks’ liquidity shocks are evaded (Allen & Carletti, 2008). Disruption in the supply of liquidity as witnessed by all during the recent crisis can cause chaos in the financial sector.
“When all markets fail, it’s a sign that liquidity is being withdrawn” – Stephen Lewis
Outline the measures and magnitude of poverty in developing countries, and discuss the views of Goulet, Sen and others that economic development must mean more than just a rise in average per capita income
"Wars against nations are fought to change maps; wars against poverty are fought to map change."-- Muhammad Ali.
Poverty is often viewed as a global phenomenon. It is seen by almost everyone as a problematic concept yet many neglect it by accepting that it exists but not taking any evasive action to help reduce it. For development economics, poverty is one of the key areas of study as it is becoming a major concern because of the terrifying quantity in it and for those who are externally affected by it. There is no single, universally accepted definition of ‘poverty’. However, generally, poverty can be defined as an inability to afford an adequate standard of consumption (John Black, 2003). Textbooks often on the subject start with the distinction between ‘absolute’ and ‘relative’ poverty (House of Commons, 2004). Development economists use the concept of absolute poverty to represent a specific minimum level of income needed to satisfy the basic physical needs of food, clothing, and shelter in order to ensure continued survival (Todaro & Smith, 2006).
The world has deep poverty accompanied by plenty of it. The magnitude and extent of poverty in any country depend on two factors: the average level of national income and the degree of in inequality in its distribution (Todaro & Smith, 2006). Of the world’s 6 billion people, 2.8 billion—almost half—live on less than $2 a day, and 1.2 billion—a fifth—live on less than $1 a day, with 44 percent living in South Asia (World Bank, 2000/2001).
In East Asia the number of people living on less than $1 a day fell from around 418 million to around 278 million between 1987 and 1998. Yet in Latin America, South Asia, and Sub-Saharan Africa the numbers of poor people have been rising. Number of poor people increases in sub-Saharan Africa from 217 million to 290 million. Two regions fared particularly badly. In Europe and Central Asia the number in poverty increased from 1.1 million to 24 million. (World Bank, 2000/2001)
There are several different measures for poverty. The World Bank defines poverty as the inability of people to attain a minimum standard of living (Tony Thirwall, 2006). The most obvious measure associated with living standards is the income obtained by an individual or household. However, it is not as simple as that, across different nations there will be different levels of life expectancy, education, infant mortality, which are all also considered a vital component of standard of living. An attempted measure to take these factors into account is the Human Development Index (HDI) and Human Poverty Index (HPI). Both of these were constructed by the United Nations Development Programme (UNDP). The Human Development Index measure was first introduced in the Human Development Report 1990. The HDI tempts to rank all countries on a scale of 0 (lowers human development) to 1(highest human development) based on three main variables; life expectancy at birth, educational attainment, and standard of living measured by real per capita income adjusted for purchasing power parity (PPP) (Tony Thirwall, 2006). The Human Poverty Index was introduced in the 1997 Human Development Report. The Human Poverty Index (HPI) of UNDP measures deprivation in basic human development by combining the basic dimensions mentioned before of poverty and reveals the differences between human poverty and income poverty (Malati Pochun, 2006). Analogous in many ways to the HDI, the UNDP argued that human poverty should be measured in terms of three main indices; life (the percentage of the population not expected to survive to the age of 40), basic education (adult literacy rate), and overall economic provisioning (the percentage of people without access to safe water and the percentage of underweight children under five years old). (Tony Thirwall, 2006; Todaro and Smith, 2006; Gillis, Perkins, Roemer, Snodgrass, 1996)
Other measures and comparisons across countries of poverty require a consumption poverty line. World Bank defines a poverty line as the monetary cost of achieving a standard of living above which one is not deemed to be poor (World Bank, 1994). There are two ways a consumption poverty line can be derived: Purchasing Power Parity (PPP) method and the food energy method. A country’s PPP is defined as the number of units of the country’s currency required to buy the same basket of goods and services in that a US dollar would buy in the United States (Todaro & Smith, 2006). One flaw of the PPP method is that the poverty line it extracts does not take into account the nutritional intakes obtained from different nation’s consumption bundles. The food energy method is regarded more complicated than the PPP method but it looks to solve the nutritional intake issue. This extraction of the poverty line is defined as entailing a minimum internationally agreed calorie intake line, and converting consumption bundles into calorie intakes using the nutritional values of consumption goods (with non-food goods having a zero value). The problem here, however, is that consumers in different countries may choose different combinations of food and other goods which then require different incomes to meet nutritional requirements (Tony Thirwall, 2006).
An alternative method to measuring poverty is the head count index. This measure simply adds up the number of people who fall below the poverty line (when the headcount is taken as a fraction of the total population). By this measure, the World Bank has calculated that the number of poor people in the developing countries is nearly 1.2 billion (Tony Thirwall, 2006). Although it is easy to interpret, the headcount index is not sensitive to how far below the poverty line poor people are. This leads to inconsistency in simple comparisons between countries over a period of time. Hence, a poverty gap method is used that measures the total amount of income necessary to raise everyone who is below the poverty line up to that line (Todaro & Smith, 2006). According to the text in Growth & Development (2006), only about 3 per cent of total consumption in the developing countries as a whole is required to leave everybody above the poverty line, which is surprisingly small.
All the measures mentioned above are the main measures of poverty. There are a few other measures which are more related to the inequality of income rather than the measurement of absolute poverty. These measures include the Lorenz curve, Gini-ratio and the Forster-Greer-Thorbecke measure.
When using per capita income (PCY) figures to measure poverty, the difficulties of measuring real per capital income and real living standards between countries must be continually borne in mind (Tony Thirwall, 2006). Unless the definition of poverty is underdevelopment, it is not ideal to use per capita income as an index of development. There are several reasons for this. One of these reasons is the problems created when measuring income in different countries, particularly in developing countries. This leads to inaccurate figures and a severe amount of difficulties in intercountry comparisons. Also a per capita income figure to measure whether a country is developed or underdeveloped is deemed arbitrary by Tony Thirwall (2006), as it “ignores factors as the distribution of income within countries, differences in development potential and other physical indicators of the quality of life”. However, even though the arbitrariness of per capita income is a concern, it is still very handy to have a readily available for use and easily understandable criterion for classifying countries, and perhaps per capita income is the best single index we have. In general, therefore, we conclude that per capita income may be used as a starting point for classifying levels of development, and can certainly be used to identify the need for development.
Denis Goulet (1971) looks to make an attempt and distinguishes three core components in what he deems as the meaning of development and economic growth. These three core values are life-sustenance, self-esteem and freedom. Firstly, life-sustenance is related to the ability to meet basic needs. Everyone has certain basic needs in order to survive, without which living would be impossible. For many these basic life-sustaining needs are food, shelter, clothing and health. Also without these basic needs no country can be regarded as fully developed. This argues that a rise in per capita income figures for developing nations are not sufficient enough conditions for development. And any major development programme to eradicate poverty must also include the enhancement of these basic needs. His second basic component, self-esteem, is concerned with a sense of independence and self-respect. Exploitation and influence from inferior economies on developing countries is a major concern and no country can be fully developed if this exists. The nature and form of this self-esteem may vary from society to society and from culture to culture (Todaro and Smith, 2006). Todaro and Smith (2006) also make a valid point in their textbook Economic Development that “due to the significance attached to material values in developed nations, worthiness and esteem are nowadays increasingly conferred only on countries that possess economic wealth and technological power”, which signifies the importance that developing countries require their own self-esteem. It is impossible for per capita income to determine self-esteem and hence there must be more meaning to economic growth for developing countries than an increase in average per capita income figures. The final core value is freedom. This refers to the people of developing countries and their ability to choose. Freedom enables choice, and no country or person is free if they cannot choose. Freedom also entails choices for the people of underdeveloped nations and everyone should be entitled to create their own path based on their own personal decisions. All three of Goulet’s components are linked to each other, they all are caused or the result of one or the other. They provide another dimension to the meaning of economic growth of developing countries.
Amartya Sen, who won a Nobel Prize for Economics in 1998, has similar related concepts of development as Goulet, which he defines in terms of the expansion of entitlements and capabilities. Sen supports Goulets’ argument that there must be more to economic development than a rise in average per capita income figures. He argues poverty cannot be properly measured by income or even by utility as conventionally understood (Todaro and Smith, 2006). Economic development for Sen, should be thought of in terms of the expansion of entitlements and capabilities. Sen defines entitlements as ‘the set of alternative commodity bundles that a person can command in society’ (Tony Thirwall, 2006). Sen generates her argument in an entirely different view that doesn’t attach importance to material objects but rather concentrates on the feelings of human beings. He emphasises that what a person can do, or be is just as important for economic development in developing countries. This perspective of the meaning of economic development has lead many others to believe that health and education are of great significance and those countries that achieve statistical goals when it comes to levels of income but obtain poor health and education can be referred to “growth without development” (Todaro and Smith, 2006). Also similarly to Goulet, Sen puts a huge emphasis on freedom as a primary aspect for economic development. This comes under his component of capabilities, which he defines as ‘the freedom that a person has in terms of the choice of functionings’ (Todaro and Smith, 2006). Economic development can only be gained if an increased level of ‘freedom’ was achieved, or the removal of ‘unfreedom’ characteristics such as starvation, poor health and lack of basic needs along with economic insecurity and basic civil rights (Tony Thirwall, 2006). No country can achieve economic development if these factors are not improved and if freedom isn’t enhanced. By these views it is clearly evident that a rise in average per capita income is more of a statistical satisfactory measure for growth but economic development has a much deeper meaning. The attention to capabilities and entitlements reflects how the meaning of economic growth for developing countries is being taken away from maximising growth and distribution of income. By judging Goulet’s and Sen’s views on economic development, it is fair to say development is achieved when there is an improvement in basic needs, self-esteem for a nations’ population and the country itself, as well as expansions in the entitlements, capabilities and freedom available to people.
“It would be nice if the poor were to get even half of the money that is spent in studying them.” ~Bill Vaughan
Explaining How the Current Account is Determined in an Inter Temporal Trade Model
The intertemporal approach first emerged in the early 1980s as an attempt to understand the consequences of external shocks for an open economy with a forward-looking dynamic optimization framework (Bluedorn 2005). Ever since Svensson and Razin (1983) pioneered intertemporal analysis in a cutting edge analysis of a microeconomic conundrum – the Laursen-Metzler-Harberger problem of the terms of trade effect on spending – intertemporal approaches to the current account have flourished (Dornbusch, 1998).
Read the full research documentation by clicking the link below
Discuss the Implications of the Different Definitions of Horizontal Equity
Horizontal equity is considered as a fundamental principle in order to follow and evaluate a redistributive tax policy. Horizontal equity comes under the topic of fairness in tax systems, which has been and I am most certain will continue to be a major issue. Most criticisms of tax systems begin with their unfairness. There are two main distinct concepts in fairness: horizontal equity and vertical equity. Vertical equity doesn’t have many definitions – some individuals are in a position to pay higher taxes, and that these individuals should do so. In simpler terms, people who are better off should pay more taxes (Joseph Stiglitz, 2000). However, horizontal equity is not as straight forward as it has more than one definition and therefore different implications.
Read the full research documentation by clicking the link below
What was the political economy of Eastern Enlargement of the EU and the Treaty of Nice? Why do Baldwin and Wyplosz claim that the Nice Treaty rules made things worse in comparison to no reform at all?
Many regard political economy as the original name for the discipline of economics. It is sometimes argued by economists that it is actually a better name for the subject, as it draws attention to the political motivation of economic policies and decisions (Black, 2002, pg358). It examines policies that emphasise the interaction between politics and economics and their consequent effects (The Foundation For American Communications website). It is viewed as an approach that takes into consideration political power, voting systems and lobbying.
Read the full research documentation by clicking the link below
