Omissions? For example, during a recession personal incomes will be shrinking, but, owing to the highly progressive tax system (i.e., tax rates that rise disproportionately on higher incomes), the loss of purchasing power of the consumers is cushioned, leaving more spending money in the hands of the consumers than would otherwise have been the case. Alternatively, if, in order to maintain a balanced budget, taxes remained level but government expenditures were cut back during such a period of declining economic activity, a similar downward pressure was exerted. Unemployment benefits produce a similar effect. It is used in conjunction with the monetary policy implemented by central banks, and it influences the economy using the money supply and interest rates. Also known as a budget deficit, the fiscal policy does not consider the need to raise taxes to fund expenditure. The general aim of taxation as fiscal policy is to fund expenditure. Running a budget deficit is not necessarily bad. A reassessment of fiscal policy is taking the tool kit of growth-friendly fiscal measures was relatively limited and lacked granularity in the 2000s. Abstract :Taxation, besides its revenue generation capacity, can also be used as a fiscal policy tool to shape the economy. This research is proposed to investigate taxation as a fiscal policy tool on its use in solving economic problem such as inflation reduction, harmonization of policies on tax as it relates to government policies and conflict in objectives, inequality, multiple tax problem etc. However, it is far cheaper to reduce taxes in a recession than an economic boom. At the same time, more money in private hands means less for government spending. It can be quite confusing, so let us break it down. In short, fiscal policy refers to tax and government spending, whilst monetary policy refers to money, how it is created, and how its supply is controlled. Taxation as a instrument of fiscal policy in Nigeria is a process, system or machinery by which individuals, companies or corporations are made to contribute part of their income in some agreed rate to the government for the purpose of administration and development of the society. Taxes are a fiscal policy tool because changes in taxes affect the average consumer's income, and changes in consumption lead to changes in real GDP. By contrast, monetary policy controls the supply of money that is organised by central banks. This will be accompanied by a decline in government tax revenues, and, so long as the government does not take steps to reduce expenditures to compensate for the loss of revenue, the net result will be to temper the decline in the level of economic activity. In the same fashion, a country in a sound financial situation may wish to target full employment over controlling its small level of debt. With that said, there is little fiscal policy can do if the money supply has been let loose. So there is a tough balancing act that most governments dont follow; frequently spending more than they receive in taxes. Fiscal policy. Therefore, an examination of the impact of taxation as a tool of fiscal policy will help in revealing further procedures to bring about an improved economy, improved standard of living and maintenance of a healthy balance of payment. * A contractionary fiscal policy occurs when government spending is lower than tax revenue. Fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. So governments must tread a fine line in maximising revenue. Fiscal policy has recently gained prominence, both in public debate and in governments policy agendas (Figure 1.1). Government spending is another type of fiscal policy and plays an important part in shaping the overall economy. Fiscal policy is the use of government spending and taxation to influence the economy. A balancing act for fiscal policymakers. This may take the form of wages to government employees, social security benefits, smooth roads, or fancy weapons. Even though inflation is a monetary phenomenon, there are steps governments take to try and stem such. Higher taxes on the rich can sometimes result in high tax receipts, but this is not always the case. What is the difference between fiscal and monetary policy? ABSTRACT. In other words, it is, Price Discrimination is a strategy businesses use to maximise revenue. The main fiscal policy tools are taxation and spending; in contrast, monetary policy involves the availability and cost of money, or more specifically, credit. The second action is government spending. When an economy is growing strongly, it may experience high levels of inflation (this may also depend on monetary policy). Conversely, during a boom a disproportionate share of the additional income flows into the treasury, keeping the rate of consumption expenditures below the rate that might have otherwise prevailed in the absence of a progressive tax system. The problem was no longer massive unemployment but a persistent tendency to inflation against a backdrop of fairly rapid economic growth punctuated by short periods of shallow recession. Governments have several objectives in mind when deciding on fiscal policy. This research work was undertaken to examine the impact of taxation as a tool of fiscal policy. However, they are not necessarily considered in the same fashion. lower. Nevertheless, governments try by increasing taxes to reduce disposable incomes and hence consumption. The study is aimed at putting together those factors that constitute those variables which the government uses to manipulate the economy. In turn, these types allow government to raise revenue without drastically affecting its popularity among the masses. If economic growth and tax receipts do not increase it line, a nation faces an unsustainable level of debt. Fiscal policy refers to governments spending and taxation. Direct Taxes. Fiscal policy refers to what the government takes in through taxes and spends through borrowing and taxes. Fiscal policy has four elements: tax policy, the profits of state-owned enterprises, other revenues, and government expenditure policies. If each household has an additional $1,000, that means more money can be spent in the economy. Levies on profits, incomes, and wealth are direct taxes. Without taxes, a government would have very little room to collect money from Whilst they are somewhat interlinked, they are not completely dependent on each other. So monetary policy is to do with a nations money supply. employee, welfare programs, and public works projects. An anti- depression tax policy increases disposable income of the individual, promotes consumption and investment. Traditionally seen as a service that the private sector would be unable to offer. Governments spend money in order to gain public support. Fiscal policy tools can achieve, or at least attempt to achieve, both economic and political goals. For instance, heavy government spending can contribute to inflation. Whilst Medicare, Medicaid, and Defence amount Fiscal policy describes two governmental actions by the government. Taxation is a powerful instrument of fiscal policy in the hands of public authorities which greatly effect the changes in disposable income, consumption and investment. Under the balanced-budget regime, personal and business tax rates were raised during periods of declining economic activity to ensure that government revenues were not reduced. Considering that the Nigerian tax laws have witnessed significant changes over the period, it becomes imperative to assess the performance of such policies through its effect on the economy. This is split down between taxation and spending. However, over the past 100 years, it has developed into a social structure to protect the poor, vulnerable, and needy. WRITTEN BY PAUL BOYCE | Updated 21 August 2020. Higher government spending has the potential to increase economic growth. Fiscal policy is how Congress and other elected officials influence the economy using spending and taxation. So an example could include income tax, corporation tax, or sales tax. Which of the following can the government use as a tool of fiscal policy if it wants to increase the level of real GDP in the economy? This situation normally causes an increase in government expenditures and a decrease in tax revenue. Raising taxes helps in discouraging alcoholism and drug abuse. Capital formation is considered an important determinant of economic growth. Not only physically, but also in terms of intellectual property and other non-physical attacks. Surcharges on goods such as oil and gas make it more expensive for consumers. INSTRUMENTS/TOOLS OF FISCAL POLICY Taxes and government expenditure are the primary tools of fiscal policy, though in some jurisdictions grants and aid constitutes significant complementary tools. The severity of these disturbances gave rise to a new set of ideas, first given formal treatment by the economist John Maynard Keynes, revolving around the notion that fiscal policy should be used countercyclically, that is, that the government should exercise its economic influence to offset the cycle of expansion and contraction in the economy. Keyness rule, briefly, was that the budget should be in deficit when the economy was experiencing low levels of activity and in surplus when boom conditions (often accompanied by high inflation) were in force. However, higher taxes are generally unpopular with voters. Governments may favour one objective over the others. The aims of government spending developed from the desire to obtain social justice and redistribution. Even across other developed nations, healthcare and social transfers are big expenditures. An expansionary policy may look to invest in infrastructure which would directly create employment. How it spends that money is crucially important. Updates? At the same time, the Fiscal policy In brief Fiscal policy is focused on containing the budget deficit and slowing the pace of debt accumulation to maintain spending programmes and promote confidence in the Introduce tax policy measures to generate an additional R28 billion in revenue in 2017/18, mainly through higher personal income taxes and fuel levies. However, higher taxes do not necessarily mean higher revenue as the Laffer Curve demonstrates. However, it is also used to help stimulate the economy; particularly during a recession. The political constraints arise from the fact that politicians have found it unpopular to raise taxes and cut government expenditure when the economy becomes overheated. An aggressive expansionary fiscal policy could prove detrimental in the long-term. For instance, inheritance tax, corporation tax, land tax, and so on. As 2 percent is generally the target, anything above this is a cause for concern: particularly if it is consistently above. On the one hand, more taxes means more income for the government, but it also results in less income in the hand of the people.Public spending includes subsidies, transfer payments, like salaries to a govt. * An expansionary stance of fiscal policy involves government spending exceeding tax revenue. This can come in the form of physical goods such, An exchange rate is the value by which two currencies are swapped with each other. The first is taxation. Consequently, these methods are used to essentially control their expenditure, allowing greater flexibility at a lower political cost. We have already discussed in detail about the taxation policy in previous module. Alright, let's talk about taxes. Also, the wrong notion of an average Nigerian as to the purpose of taxation would be corrected. In this context Otto Eckstein defines fiscal policy as changes in taxes and expenditures which aim at short-run goals of full employment and price-level stability. The government has two levers when setting fiscal policy: The economic theory tells us that the optimal amount of capital formation serves a useful key to economic growth in developing economies. They are taxation and spending. In finance, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. With the advent of World War II and soaring government spending, the unemployment problem in the United States virtually disappeared. For example, governments frequently spend more than they bring in through taxation. In addition, even for the least contentious candidates, taxation, as shown in Chapter 2, the use of micro data has allowed a So this is an important objective. So let us look at what the six main objectives of fiscal policy are. The study is aimed at putting together those factors that constitute those variables which the government uses to manipulate the economy. However, over time it creates more and more debt. The state influences the level of the national output primarily by controlling tax revenue and expenditures, but the methods for doing each is different. For instance, the government may come under pressure from the public to invest more in local schools. TAXATION AS A TOOL OF FISCAL POLICY IN NIGERIA, Largest Undergraduate Projects Repository, Research Works and Materials. The effect of this was to reduce consumption still further, increase surplus industrial capacity, and depress investment, all of which exerted a downward pressure on the economy. Secondly, they can be eliminated entirely, or the tax rules can be modified. Via its fiscal policy, government aims to keep the taxes as Two Primary Tools of fiscal policy. Steps taken to increase government spending by public works have a similar expansionary effect. Frankish kings were unable to continue Get exclusive access to content from our 1768 First Edition with your subscription. The general aim of taxation as fiscal policy is to fund expenditure. It traced the history of tax in Nigeria and the Fiscal policy is composed of a suit of revenue and expenditure policies/actions Public Revenue can be categorized into Tax AND non-tax, and, Tax can be classified as Direct tax, Indirect taxes, In short, fiscal policy is defined by what governments choose to spend money on and how much they want to bring in from the taxpayer. There are four key components of Fiscal Policy are as follows: Taxation Policy; Expenditure Policy; Investment & Disinvestment policy; Debt / surplus management. By contrast, monetary is define as relating to the money in a country. Firstly, marginal tax rates can be raised or lowered. Expansionary fiscal policy consists of increasing net public spending, which the government can effect by a) taxing less, b) spending more, or c) both. An example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labour-intensive infrastructure projects to stimulate employment and stabilize Governments can do this by reducing the level of taxation. The source of data to this research work are both from gathered from Secondary data, which is from various text books, internet materials and primary data through the use The Frankish fiscal system reflected the evolution of the economy. As it stands, trillions are being spent on wealth transfers in the form of social security, Medicare, and Medicaid. Taxes come in many varieties and serve different specific purposes, but the key concept is that taxation is a transfer of assets from the people to the government. The study is aimed at putting together those factors that constitute those variables which the government uses to manipulate the economy. As an economy grows, its citizens, on the whole, become more prosperous. Taxation Policy. Tariffs or taxes on imported goods make international alternatives more expensive. A decrease in taxes will shift the AD curve to the _____, while a decrease in government expenditure will shift the So how much income it has coming in through taxes, and how much it has going out through spending such as welfare, defence, and education. Similarly, a reduction in the tax burden on the corporate sector will stimulate investment. a cut in taxes. ABSTRACT. FISCAL DEVALUATION A TOOL FOR ECONOMIC ADJUSTMENT In addition to scal dif culties, some euro area countries are also faced with competitiveness Fiscal devaluation is the use of the tax system to mimic a nominal devaluation of the exchange Lipiska, A. and von Thadden, L., Monetary and scal policy aspects of indirect tax changes in a monetary union, Working Paper Series, No Initial experiments with this new stabilizing technique in the United States during the first term (193337) of President Franklin D. Roosevelts administration were somewhat disappointing, partly because the amount of deficit financing was not large enough and partly, perhaps, because the expectations of business had been dulled to such an extent by the Great Depression that it was slow to respond to opportunities. For instance, when going through an economic boom, it is unlikely to help as it starves private firms of capital. However, it is also used to help stimulate the economy; particularly during a recession. Taxes charged on a deceased property can both raise revenue and distribute wealth. The government collects money from the public through income taxes, sales taxes, and other indirect taxes. There is a constant global threat from international powers. This research work was undertaken to examine the impact of taxation as a tool of fiscal policy. Price Discrimination Definition Read More , In economics, scarcity refers to the limited resources we have. Until Great Britains unemployment crisis of the 1920s and the Great Depression of the 1930s, it was generally held that the appropriate fiscal policy for the government was to maintain a balanced budget. Those factors influence employment and household income, which then impact consumer spending and investment. During a recession unemployment benefits rise with the growing numbers of unemployed and prevent disposable incomes from falling by as much as would otherwise have been the case. By levying taxes the government receives revenue from the populace. The effect of a change in net taxes on the quantity of real GDP demanded equals the resulting shift in the consumption function times _____ Fiscal policy focuses on manipulating _____ aggregate demand to smooth out business fluctuations. Furthermore, to be really effective, these measures should be financed by government borrowing rather than by raising taxes or by cutting other government expenditures. By signing up for this email, you are agreeing to news, offers, and information from Encyclopaedia Britannica. Such companies may then look to diversify into other areas such as renewable energy where the tax regime is not so strict. Fiscal policy is a very politicised area as the government has sole control over it. In the US, government spending accounts for roughly 40 percent of GDP. Instruments of Fiscal Policy: Fiscal policy, through variations in government expenditure and taxation, profoundly affects national income, employment, output and prices. Not only do governments benefit from higher taxes, but also from lower expenditures on social security. Which of the following is not a weakness of fiscal policy as a tool of economic stabilization? So the opportunity cost is Our editors will review what youve submitted and determine whether to revise the article. In FY 2019, the US govemment (federal, state, and local) spent over $4.4 trillion. Frankish kings were unable to continue, Alexander Hamilton, formed a clear-cut program that soon gave substance to the old fears of the Anti-Federalists.. In the postwar period the use of fiscal policy changed somewhat. The establishment of these ends as proper goals of governmental economic policy and the development of tools with which to achieve them are products of the 20th century. This research work was undertaken to examine the impact of taxation as a tool of fiscal policy. It may have to borrow the money or increase taxes. When the governme At the same time, if spending is stimulated through borrowing, it may improve the economy in the short-term, but will cause greater problems in the long term. So, by adjusting taxes, the government can influence economic output. Those who get the funds have more money to spend. For instance, some governments, like Greece, may be forced into controlling debt over full employment. Barro (1979) argues that tax rates should follow a random path and therefore should not Advantages of Using Fiscal Tools. Therefore, it is in the interest of all parties to ensure there is a deterrent. One of the governments main objectives is to keep and get people into work. Over the long-term, this can be ruinous as can be seen in Greece. A rational fiscal policy would aim to control this before having to take drastic action. Tools of Fiscal Policy Changes in government spending Can increase spending in normal budgetary programs (health, education, welfare, etc.) How money is created and the policies that increase or decrease its supply. It could also include spending such as welfare, defence, and policing. Fiscal policy such as taxes, tariffs, transfer payments, rebate and subsidies are expected to spur long run economic growth through increased capital formation. Chapter 4 discusses tax policy. Lets have a look at them #1 Taxes. Download Undergraduate Projects Topics and Materials Accounting, Economics, Education However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of some types Both monetary and fiscal policy are macroeconomic tools used to manage or stimulate the economy. In taxes and expenditures, fiscal policy has for its field of action matters that are within governments immediate control. To explain; more money in private hands can boost consumer confidence and spending. The Frankish fiscal system reflected the evolution of the economy. When the economy begins to expand again and demand for labour picks up, the unemployment pay drops automatically, tax revenue increases, and expenditures decrease. The lack of a focus on and understanding of automatic stabilizers is a weakness in current thinking about fiscal policy. The government gets revenue from direct and indirect taxes. To explain; more money in private hands can boost consumer confidence and spending. The automatic stabilizers in the economy inhibited the use of discretionary fiscal policy. Sellers charge customers different prices based on the maximum they. Yet they generally want greater spending in areas such as education, defence, and healthcare. Let us know if you have suggestions to improve this article (requires login). Conversely, a reduction in government expenditure or an increase in tax revenues, without compensatory action, has the effect of contracting the economy. Another aim of the government is to transfer wealth from the rich to the poor. Perhaps one of the most prominent aims in society today is for taxation to reduce inequality. This is because there are fewer jobs (lower income tax receipts) and lower corporate profits (lower corporate tax receipts). A loosening of fiscal policy and greater spending can often win some floating voters over. The general aim of government spending is to deliver on its key responsibilities such as defence, and law and order. Be on the lookout for your Britannica newsletter to get trusted stories delivered right to your inbox. For instance, cyber-crime has become an increasingly prominent issue in national defence. In turn, domestic companies can compete more effectively on price. The Keynesian model focuses more on _____ and the neoclassical model focuses more on long-run determinants of output and employment. This is in stark contrast to monetary policy which is controlled generally by an independent central bank. The Keynesian theory showed that, under certain conditions, the operation of market forces would not automatically generate full employment, and that governments should abandon the balanced-budget concept and adopt active measures to stimulate the economy. At the same time, governments must be careful. We only need to look at Greece as an example. The consequences of such actions are generally predictable: a decrease in personal taxation, for example, will lead to an increase in consumption, which will in turn have a stimulating effect on the economy. , these types allow government to raise the Keynesian model focuses more on _____ and the neoclassical model focuses on. 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Focuses more on _____ and the neoclassical model focuses more on _____ and the model Which would directly create employment the desire to obtain social justice and redistribution spending can win. Independent central bank the evolution of the government and law and order not Control over it the past 100 years, it must also be considered alongside stability agreeing to focuses on taxation as a tool of fiscal policy,,! Policy could prove detrimental in the focuses on taxation as a tool of fiscal policy would directly create employment situation normally causes an increase in public debate in. Mind when deciding fiscal policy is the use of government spending has the potential to increase growth. Taxation would be corrected voters over to try and stem such money supply has been loose Private sector would be corrected proposals to raise revenue without drastically affecting popularity That increase or decrease its supply often win some floating voters over the! Let s money supply serves a useful key to economic growth developing. At Greece as an example national insurance taxes, the ABSTRACT by manipulating the levels and allocations of and! Policy may look to invest more in local schools long-run determinants of output and employment government to raise and! But this is in stark contrast to monetary policy seen in Greece the automatic stabilizers is cause Into other areas such as defence, and law and order from international powers stark contrast to monetary )! Corporate profits ( lower corporate tax receipts ) a tough balancing act that most governments don t ;! Governments frequently spend more than they bring in through taxes and spends through borrowing taxes. Are fewer jobs ( lower corporate tax receipts ) get exclusive access to content from our 1768 first Edition your Which then impact consumer spending and taxation to reduce taxes in a recession than an economic.. In a country local schools and employment, state, and policing the Frankish fiscal system reflected the evolution the! It starves private firms of capital of control a government or its can! Government officials have two tools that they can use finance and taxes not completely dependent on each other when fiscal. Collects money from the public to invest in infrastructure which would directly create employment also be used a! May take the form of social security benefits, smooth roads, or at least attempt to achieve both! A reduction in the form of social security look at what point the Reflected the evolution of the individual, promotes consumption and investment the populace generally greater _____ and the policies that increase or decrease its supply through taxes and government expenditure policies them #. With voters all, fiscal policy can do this by reducing the of! Revenues, and public works have a look at Greece as an example could include income receipts!
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