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- 6 Marks
Question
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)
Answer
- There are two main types of taxes: direct taxes and indirect taxes. A tax cut increases disposable income, leading to increased consumption spending. The income will increase by a multiple of the decrease in taxes.
- Taxation is an essential fiscal policy tool because it creates revenue for government public expenditure. The first goal in a development strategy for taxation policy is to ensure adequate revenue generation.
- Taxes can be used to reduce inequalities through income redistribution. For instance, higher rates of income, capital transfer, and wealth taxes are adopted for this purpose.
- Social objectives are also pursued by taxation, such as discouraging activities deemed undesirable, e.g., excise taxes on liquor, tobacco, and luxury goods, along with Betting and Gaming Levy.
- Taxes influence growth by affecting the aggregate supply of production factors and resource utilization efficiency.
- The taxation policy can promote equitable wealth distribution by providing social services that benefit lower-income groups.
- Tags: Economic growth, Fiscal Policy, Taxation
- Level: Level 3
- Topic: Tax planning
- Series: NOV 2017
- Uploader: Dotse