Evaluate the macroeconomic effects of an increase in income tax rates on a country or countries of your choice

Edexcel A-Level Economics 25 Mark Question

In April 2024 the Scottish government increased rates of income tax. Income earnt over £75,000 will be taxed at 45% instead of 42%, whilst income earnt over £125,140 will be taxed at 48%, an increase from 47%. The Estonian government has announced plans to increase the country's income tax rate for all citizens from 20% to 22% in 2025. Evaluate the macroeconomic effects of an increase in income tax rates on a country or countries of your choice. (June 2026)

Plan

• Country: UK
• Paragraph 1
  • Argument: one macroeconomic effect of higher income tax rates is an increase in unemployment
  • Diagram: decrease in aggregate demand
  • Evaluation: however, the overall effect depends on the original state of the economy and the size of the multiplier
• Paragraph 2
  • Argument: another macroeconomic effect of higher income tax rates is a decrease in potential growth
  • Diagram: decrease in long-run aggregate supply
  • Evaluation: however, higher tax rates can generate greater tax revenue (up to an extent), which can allow for greater investment in the future

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