FISCAL POLICY FISCAL POLICY Government ... - Reesonomics
Government expenditure. Public goods. (would not be provided by the private sector). Street lighting, flood defences. Merit goods. (would be underproduced.
(would not be provided by the private sector) Street lighting, flood defences
Education and health
Government expenditure Redistribution of income and wealth Minimum wages, unemployment benefit
Regulation of economic activity Corruption, military, media control, health and safety
FISCAL FISCALPOLICY POLICY
Tax burden Tax drift
Direct taxes
Proportion of national income taken in taxes
Income tax, national insurance capital gains tax, council tax corporation tax
Taxation Progressive Direct taxes – because the proportion of tax increases as income rises
Indirect taxes VAT, excise duties on fuel, alcohol tobacco, car tax; TV licence
Regressive Indirect taxes – because the proportion of tax decreases as income rises
FISCAL FISCALPOLICY POLICY Taxation affects the demand side and the supply side of the economy
Demand Rise in income tax – reduce disposable income reduce consumer spending Rise in corporation tax – reduce post-tax profits reduce share dividends, reduce investment Rise in VAT or Excise duty – increase the price of goods, reduce consumer spending (NB elasticity)
Supply Rise in income tax – reduce post-tax income, increase hours worked, increase national output, reduce incentive to work A rise in corporation tax – reduce investment, reduce productive capacity, increase tax drift Rise in VAT or Excise duty – increase in prices, increase firms' costs, reduce productivity (NB exports excluded from VAT and Excise duty). NB Tax drift.
FISCAL FISCALPOLICY POLICY
Indirect taxation
FOR
AGAINST
Changes in indirect taxes change the pattern of demand for particular goods and services (France – restaurants).
Indirect taxes increase the price of goods and services. This will increase firms' costs and cause cost-push inflation.
Indirect taxes will not distort the choice between work and leisure (higher direct taxes may encourage workers to reduce their hours of work)
Revenue streams are highly volatile. In a boom when expenditure is high, revenue grows rapidly; conversely in a recession when expenditure falls sharply, so will the revenue (NB same or worse for direct taxes?)
Indirect taxes are difficult to avoid. Some workers can evade paying direct taxes by trading in cash and not declaring their income)
Many indirect taxes have regressive effects and will therefore widen the gap between rich and poor
FISCAL FISCALPOLICY POLICY
Calculate Taxes In (Growth)
Borrowing NB IR and Stability Pact
Government
Calculate Transfers
(unemployment / health)
Fixed expenditure
NB Tax time lags Takes time to recognise demand is too high or too low Takes time to vote and implement appropriate policy Takes time for the policy to work (depending on tax)
FISCAL FISCALPOLICY POLICY
Who should pay? 1. National defence 2. Unemployment 3. Health system 4. Education 5. National energy system 6. Train network
1. Provide a train system for ESSCAland – how, where and why? 2. Provide an energy system for ESSCAland – how where and why? 3. Provide a motorway system for ESSCAland – how where and why?
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