The current level of government borrowing has become a topical issue for discussion causing observers to wonder whether borrowing is good or bad. In the light of this, you are required to:
Required:
Discuss how taxation can be used as a fiscal tool in fiscal policy. (6 marks)
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There are two main types of taxes: direct taxes and indirect taxes. A tax cut increases disposable income, and leads to added consumption spending. Income will increase by a multiple of the decrease in taxes.
Taxation has been an important policy field throughout history and will stay a crucial aspect in future politics since it creates the basis for the state to work.
The following are some goals of taxation;
- The primary function of a tax system is to raise revenue for the government for its public expenditure. So the first goal in the development strategy as regards taxation policy is to ensure that this function is discharged adequately
- Taxes are used to reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends.
- For social proposes such as discouraging certain activities which are considered undesirable. The excise taxes on liquor and tobacco, the special excise duties on luxury goods, betting and Gaming Levy are examples of such taxes, which apart from being lucrative revenue sources have also goals.
- Tax factors that affect development and growth.
- Taxes affect growth in two ways. First, by influencing the aggregate supply of the main factors of production by raising or lowering their net (after tax) returns; and
Second, by influencing the efficiency of resource utilisation factor (total productivity).