The UK government is considering two ways to raise revenue for additional NHS spending. Table 1 contains estimates for the first year.
| Measure | Raise VAT from 20% to 22% | Raise basic income-tax rate from 20% to 21% |
|---|---|---|
| Estimated annual revenue | £9.6 billion | £11.8 billion |
| Adults or taxpayers directly affected | 53 million adults | 24 million taxpayers |
| Tax share of income, lowest-income fifth | 11% | 2% |
| Tax share of income, highest-income fifth | 6% | 16% |
[ITEM A] Supporters of the VAT option argue that nearly every consumer contributes when spending, while earnings from work are not directly reduced. They say a broad tax base makes revenue more dependable and that necessities could remain exempt.
[ITEM B] Opponents argue that VAT absorbs a larger share of a low income and raises prices. They favour income tax because people below the tax threshold are protected and higher earners contribute a larger share.
Define the term 'indirect tax'.
Using Table 1, calculate the extra weekly VAT revenue if taxable weekly sales remain £52 million.
Explain two possible effects of a rise in VAT on households and businesses.
Using Table 1, analyse the likely distributional effects of the two tax options.
Do you think the UK government should raise VAT rather than the basic rate of income tax to finance additional NHS spending? Use Items A and B and your own economic knowledge to justify your view.
75 exam-style questions on AQA GCSE Economics 2.1 Introduction to the national economy, covering 2.1.1a What an interest rate is, 2.1.1b Interest rates and consumer decisions, 2.1.1c Interest rates, producer decisions and calculations, 2.1.2a UK government revenue and spending, and 2.1.2b Direct, indirect and progressive taxation. Each one has a worked solution and a mark scheme showing where the marks go.