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  • About the Economic Futures Hub
  • Unit 1: Economics of the Market
  • Unit 2: UK Economic Activity
  • Unit 3: Global Economic Activity
  • Data for Applied Economists
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Who are the Fraser of Allander Institute?

Created by Economic Futures. We are hosted by the FAI. Contact us at economicfutures@strath.ac.uk for feedback or collaboration.

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Tax

Tax

Tax

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Welcome! In this section, we'll dive into the world of taxation. This is how the government raises money, mainly from individuals, consumers, and businesses. The revenue collected is fundamental for financing government spending.
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The SQA Higher Specification for this section:
  • Distinctions between, and examples of, direct and indirect taxation
  • Progressive and regressive taxation
  • The balance between direct and indirect taxation
  • The effects of taxation on individuals and firms
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These summary slides are best viewed fullscreen on a computer. If you are on a mobile device, click here.

Scotland’s Total Revenues

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Total revenues in Scotland are collected by the Scottish Government, Local Government and by the UK Government to pay for spending in each government. Learn more about devolution and revenues here.
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The annual Government Expenditure and Revenue Scotland (GERS) report allows us to understand this mix of spending in Scotland. The Fraser of Allander Institute has a helpful guide on understanding the report:
A Guide to GERS (2020) | FAI

The aim of the Government Expenditure and Revenue Scotland (GERS) report is to enhance public understanding of fiscal issues in Scotland. It is published every year by the Scottish Government with the upcoming report scheduled for publication on 26 August.

fraserofallander.org

A Guide to GERS (2020) | FAI

You can also download the Government Expenditure and Revenue Scotland (GERS) 2021-22 report and database below:

government-expenditure-revenue-scotland-2021-22.pdf905.3KB
tables-charts.xlsx418.9KB
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Use the interactive revenue tracker below to explore the composition of Scotland’s revenue streams over time.
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Task: Select ‘Value added tax’ and ‘Income Tax’ on the search panel.
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Which two time periods saw a big fall in revenue from these taxes? Why did they drop so significantly?

The 2008 financial crisis and the 2020 Covid-19 Pandemic both saw the economy contract sharply. As the economy expands, tax revenues tend to rise. As the economy contracts, tax revenues tend to fall. This is deliberate - automatic fiscal stabilisers mean that when the economy is under pressure, taxes fall and spending increases as the need for unemployment benefits and state welfare increases, pushing up demand.

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Scottish Tax Revenue Composition: Over half of the revenues generated in Scotland are accounted for by the top 3 taxes in Scotland. Income Tax, National Insurance, and VAT account for the majority of tax revenues in Scotland, displaying their importance.
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The below graph follows Scotland’s total revenue over time. GERS uses 3 different measures for this: the blue line reflects the Non-North Sea Revenues (shown previously), while the yellow and orange lines include offshore revenues from oil and gas production.

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The orange line ‘including geographic share of North Sea revenue’ forecasts a scenario in which Scotland’s share of UK offshore revenues is equal to its geographical share of UK oil and gas resources. The yellow line ‘including population share of North Sea revenue’ forecasts a scenario in which Scotland’s share of UK offshore revenue is equal to its UK population share.
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Knowledge Checkpoint: Explain the distinctions between progressive and regressive taxation

  • Progressive taxation is a type of taxation where higher earners are expected to give up a greater proportion of their earnings in taxes than lower earners.
    • An example of progressive taxation is the income tax system in Scotland, where higher income brackets are taxed at a higher rate than at the UK wide level. This means that lower earners are better off while higher earners pay even more than they would in the rest of the UK.
  • Regressive taxation is a type of taxation where the tax rate is the same for everyone irrespective of income, which can lead to lower-income individuals spending a larger proportion of their income on taxes.
    • An example of regressive taxation is the VAT, which is a fixed percentage applied to goods and services, regardless of the buyer's income.
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Knowledge Checkpoint: Discuss the reasons why the UK government might change the levels of direct and indirect taxation, and the effect of this alteration on individuals and firms

  • One reason the UK government might change the levels of direct and indirect taxation is to promote fairness and reduce income inequality. For instance, by making the income tax system more progressive, the government ensures that higher earners contribute a greater share of their income to public finances than lower earners.
  • Another reason is to generate revenue. Indirect taxes, such as VAT, are a significant source of revenue for the government, particularly during periods of strong economic growth. This is because indirect taxes are applied broadly to goods and services, and therefore collect revenue from a wide range of economic activities.
  • For individuals, an increase in indirect taxes, like VAT, can lead to a higher cost of living as prices for goods and services increase. A more progressive income tax system could potentially lessen the tax burden on lower-income individuals.
  • For firms, an increase in indirect taxes can potentially reduce demand for their products if they pass on the tax to consumers in the form of higher prices. Higher direct taxes such as corporation tax could also reduce firms' after-tax profits.
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Continue to learn about government spending!

Tax Flashcards

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Check your knowledge of this section by viewing the flashcards below.