If the government revenue more than total amount of government expenditure is known as budget surplus. Conversely, government revenue less than government expenditures is known as budget deficit. Taxation and government expenditures which are direct influence the economy of a country in both short term and long term. Most countries are faced the budget deficit state, the government proposed the balanced budget amendment in order to close up the gap. The approaches to balanced federal budget are to raise additional revenue or to cut spending.
In a recession, demand is depressed, and it is expected to have a budget deficit. Trying to attain a budget surplus in a recession will involve higher taxes and lower spending – but these policies could make the recession worse. Therefore, it is better to wait until the economy recovers, and automatic fiscal stabilizers improve (higher growth automatically leads to higher income tax revenues)
In comparison, a person with a higher level of income is likely to save this additional income rather than spend it. In other words, lower and middle income taxpayers have a higher marginal propensity to consume. This consumption (purchasing) of consumer goods is important, especially during economic slowdown, to spur economic activity. Therefore, increasing taxes for the wealthy instead of the middle class is favourable for the economy. Another argument refutes the claim that lower taxes for the rich encourage them to invest more which brings about economic growth.
First the Keynesian stabilization policies for economics that centers around changing economic direction in respect to the status of the economy. Keynesian theory includes aspect of increasing deficits and implementing tax cuts in a recession to generate revenues and employment; but, in times of economic booms implement higher taxes and reduce deficits to help stabilize the economy. This would allow the economy to work towards growth and low unemployment. Thus, the shift to the Keynesian model of economics occurred in the 1940’s because of the promises of achieving the goals of a growing economy and low unemployment rate. Therefore, a balanced budget would hinder these objectives because it would go against having deficits and adding to the growing National
Taxing the wealth is an important aspect of modern democracy, especially at times like cutting welfare and increasing taxes on the middle earners. The OCED state that a wealth tax levy on the rich individuals could be very successful and should be compared with personal income tax in assessing the progressiveness od a tax regime. Wealth taxes will be paid out of income in order to address ability to pay concerns, a ceiling provision is usually included in net wealth tax legislation which states a maximum combined effective rate for income tax and wealth tax. In the long term a well-designed wealth transfer tax is likely to be more effective than a recurrent net wealth tax at reducing inequality in the distribution of wealth. This is because taxes on generation wealth transfers target and reduce the array of individual’s initial wealth
Lower debt levels will encourage the private sector to invest. Cutting budget deficits will give investors greater confidence about the long term performance of the economy. If budget deficits are not cut, it will lead to higher bond yields (e.g. as in case of Spain, Greece & Ireland). Higher deficit also increases the cost of financing the deficit which implies that the future generations will be paying interest on the current levels of debt.
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to check and influence economy of a nation. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. These two policies are used in various combinations to direct economic goals of a country. Here we look at how fiscal policy works, how it must be monitored and how its implementation may affect different people in an economy. There are two types of fiscal policy.
Progressive tax refers to the taxing instrument in which the taxing authority charges more taxes as the income of the taxpayer rises. A higher tax is collected from the taxpayers who earn more and lower taxes from taxpayers earning less. The government uses a progressive tax mechanism. Under progressive taxes, it is believed that people who earn more should pay more. The income tax is divided into slabs.
If there are more people buying these products the overall costs will drop and the product will become cheaper for the customer which raises his willingness to buy even more. On the other hand advertisements are very expensive and some economists believe that these costs are put on top of the actual price paid by the customer. There are major effect of advertisement on economy. They are follows:- 3.1.1 Price and monopoly condition:- Why people prefer Peposodent over Colgate and any other product? Are they advertised their product functionally better?
Tax is the amount of money imposed by the government on a certain product purchased by the taxpayer. Huge tax imposed on the banking industry would result in changing the lending rates of the banks. This would reduce the borrowing ability of the loan borrowers as a result of huge interest rates. However subsidies are the sum of money granted by the government to assist the banking sector in lowering their lending rates this has an effect of increasing the borrowing ability due to low interest rates. Continual increase in taxes has an effect of rabidly increasing the cost of loan, hence a deterrent factor to borrowers which would translate to financial crisis.