Macro Economics Group-13 Supratik Rath Tanushree Maji Vaibhav Pateriya Vandana
refers to government attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances).
Fiscal policy refers to the overall effect of the budget outcome on economic activity.
The three possible stances of fiscal policy
Neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue).
Expansionary stance of fiscal policy involves a net increase in government spending (G > T) through a rise in government spending or a fall in taxation revenue or a combination of the two.
Contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of the two.
Government purchases of goods and services for current use.
Government purchases of goods and services intended to create future benefits--- such as infrastructure investment or research spending.
Government expenditures that are not purchases of goods and services, and instead just represent transfers of money--- such as social security payment.
Financing government expenditures
Government financing can be achieved by:
A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements).
Governments, like any other legal entity, can take out loans, issue bonds and make financial investments.
Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders.
Seigniorage is the net revenue derived from the issuing of currency. It arises from the difference between the face value of a coin or bank note and the cost of producing, distributing and eventually retiring it from circulation.
The Four "R"s
Taxation has four main purposes or effects:
taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like market regulation or justice systems.
Transferring wealth from the richer sections of society to poorer sections.
Taxes are levied to address externalities
Tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax
Rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain.
Direct and Indirect Taxes
Refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed.
Refers to poll taxes and property taxes, which are based on simple existence or ownership.
collected from someone other than the person ostensibly responsible for paying the taxes.
Imposed on rights, privileges, and activities.
A tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax.
Proportional, Progressive, and Regressive Taxes
A progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases.
The opposite of a progressive tax is a regressive tax , where the effective tax rate decreases as the amount to which the rate is applied increases.
In between is a proportional tax , where the effective tax rate is fixed as the amount to which the rate is applied increases.
Kinds of taxes
Capital gains tax
Value Added Tax
Optimal taxation theory
Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of social welfare.
How does Fiscal Policy Work
Non discretionary element
Government spending increases during slowdown
Increase in benefits to vulnerable sections
Increase in eligible beneficiaries
Government spending decreases during boom
Reduction in benefits to vulnerable sections
Decrease in eligible beneficiaries
Government investment in infrastructure to boost demand
Reduction in tax rates
Borrowing from Central Bank
Borrowing from domestic market
Borrowing from abroad
Government Expenditure Government Receipts Fiscal Deficit Revenue Deficit Deficit on Capital Account Revenue Expenditure Revenue Receipts Capital Expenditure Capital Receipts