Fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment.
Required:
Evaluate how taxation is used as a tool of 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 fiscal policy throughout history and will stay a crucial aspect in future politics since it creates the basis for the state to work.
- 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.
- Taxes affect growth and development 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). (1 mark for each point =6 marks)