Free The Economic Implication Of Taxes Essay Example
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The tax impact on the economy is carried out by conducting fiscal policy. Fiscal (fiscal) policy is the government's measures to change government spending, taxation and state budget aimed at ensuring full employment, balance of payments, economic growth in the production of non-inflationary GDP (GNP). The main instruments for the implementation of fiscal policy are fiscal and budgetary controls. For tax regulators are installed types of taxes and fees, their structure, objects of taxation, payments subjects, sources of taxes, rates, incentives, sanctions, terms of collection, methods of making, and others. The budget controllers are the level of centralization of funds by the state, the relationship between the federal or republican and local budgets, the budget deficit, the relationship between the state budget and extra-budgetary funds, budget classification of revenues and expenditures, and others.
Fiscal policy, depending on the mechanism of response to changes in the economic situation is divided into discretionary and non-discretionary (automatic), in accordance with what is determined by the mechanism of its functioning, are specified forms and methods of control. Discretionary fiscal policy is purposeful change values in government spending, taxes and balances the state budget as a result of ad hoc decisions of the government, aimed at changing the level of employment, output, inflation and balance of payments. Non-discretionary (automatic) fiscal policy is an automatic change these values as a result of cyclical fluctuations in aggregate income. Non-discretionary fiscal policy to automatically increase (decrease) in net tax revenue to the state budget during periods of growth (decrease) of GDP, which has a stabilizing effect on the economy.
Net tax revenues are the difference between the amount of general tax revenues and the amount paid by the government transfers. When discretionary fiscal policy to stimulate aggregate demand during the recession purposefully create budget deficit due to an increase in government spending (e.g., funding for the creation of new jobs) or tax cuts. Accordingly, during the rise of deliberately created a budget surplus. Discretionary government policies associated with significant internal time lag, since a change in the structure of government spending or tax rates implies a lengthy discussion of these measures in parliament.
When non-discretionary fiscal policy is providing, a fiscal deficit and surplus occur automatically as a result of automatic stabilizers of the economy. "Built-in" (automatic) is the economic regulator mechanism working in the mode of self-regulation and reduces the amplitude of cyclical fluctuations in employment and output levels without resorting to frequent changes in government economic policy. As such stabilizers in industrialized countries generally advocate a progressive tax system, the system of public transfers, including unemployment insurance system and profit sharing. Built-in stabilizers of the economy are relatively mitigating the problem of long lags of discretionary fiscal policy, since these mechanisms are "turned on" without the direct intervention of Parliament.
The degree of built-in stability of the economy depends directly on the amount of cyclic budget deficits and surpluses, which act as automatic "shock absorbers" fluctuations in aggregate demand. Cyclical deficit (surplus) is a deficit (surplus) of the state budget caused by the automatic reduction (increase) in tax revenue and an increase (decrease) in government transfers on a background of recession (recovery) business activity. The action of "automatic stabilizers" is explained as follows. In the phase of cyclical recovery tax payments automatically increase and decrease transfer payments automatically. As a result of increasing budget surplus and inflationary boom constrained. During the same cyclical downturn taxes automatically fall and transfers grow. As a result, increases the budget deficit against the background of the relative growth of aggregate demand and output, which limits the depth of the recession. The degree of stabilization effects of the budget deficit depends on the method of financing, as might be used: an increase in tax revenues to the state budget, issue loans, money issue.
If the budget deficit is financed through the issuance of government loans, it leads to an increase in the market rate of bank interest. A recent growth leads to higher loans and a decrease in the volume of investment, which reduces the incentive effect of fiscal policy. In the case of financing the budget deficit by printing money the state receives a special income (income from printing money), which is called seigniorage. Seigniorage arises in excess money supply growth over the growth of real GNP, which leads to an increase in the average price level. As a result, all economic agents pay a kind of tax, and a portion of their income is redistributed in favor of the state through the mechanism of price increases. However, it should be noted that the built-in stabilizers do not eliminate the causes of cyclical fluctuations in the equilibrium GDP around its potential level, but only restrict the scope of these oscillations. On the basis of data on the cyclical budget deficits and surpluses cannot assess the effectiveness of fiscal policy measures, as the presence of an unbalanced budget cycle does not bring the economy to full employment of resources, and can occur at any level of output. Therefore, the built-in stabilizers of the economy, as a rule, combined with measures of discretionary fiscal policy of the government, aimed at ensuring full employment of resources.
Discretionary fiscal policy depending on the phase of the economic cycle may be stimulating or restraining. Expansionary fiscal policy (fiscal expansion) in the short term is intended to overcome the cyclical downturn of the economy and implies an increase in government spending, tax cuts or a combination of these measures. In the longer term policy of tax cuts could lead to the expansion of the supply of factors of production and the growth of economic potential. The implementation of these objectives associated with carrying out a comprehensive tax reform, accompanied by restrictive monetary policy of the Central (National) Bank and optimization of the structure of public expenditure. Contractionary fiscal policy (fiscal restriction) aims to limit the cyclical recovery of the economy and implies a decrease in government spending, tax increases or a combination of these measures. In the short term, these measures can reduce the demand price inflation rising unemployment and the decline in production. In a longer period of growing tax wedge could be the basis for decline in aggregate supply and deployment mechanism stagflation, especially in the case where the reduction in public spending in proportion to all budget and priorities established in favor of public investment in infrastructure of the labor market. Prolonged stagflation on the background of inefficient public expenditure management creates the preconditions for the destruction of the economic potential. Stabilizing impact of taxes and government spending on economic development due to the fact that they have a multiplier effect and have a direct impact on aggregate demand, the volume of national output, employment. For example, during the recession of the government to stimulate public spending, causing the animated growth in consumer spending and the multiplier effect of investment.
Multiplier of government spending is calculated as follows:
where MPC - marginal propensity to consume.
It shows the increment of GDP as a result of the growth of public expenditure on the purchase of goods and services. With a significant level of unemployment the government spends expansionary policy in the form of tax cuts. Lower taxes cause an increase in household income, which leads to increased costs and to an increase in aggregate demand, prices, expanding output and aggregate supply. As a result, real GDP increases. Low taxes also stimulate the growth of household savings and increased profitability of business investment. This increases the rate of accumulation of capital, enhanced productivity, and reduces unemployment and increase the national product. Consequently, the tax is also leads to a ripple effect.
Net taxes multiplier is the ratio of change in aggregate demand to the value of a given real change in net taxes. Its absolute value is determined by the formula:
If this formula to substitute the value of the multiplier costs, you get:
Taxes compared to public expenditure have less impact on the change of the national product. Tax multiplier multiplier is lesser than government spending on the value of the marginal propensity to consume. This is due to the fact that government spending is part of the total costs, and taxes are the factor only for consumption is one of the variables of total expenditures. In addition, if each currency used to purchase goods and services has a direct impact on GDP growth, then the tax cuts only one part of household income goes to consumption growth, as the other part goes into savings. The choice of government forms and methods of stabilizing fiscal policy depends on the use of the conceptual model of government regulation. In theory and practice of a market economy are the two conceptual models - New Keynesian and neoclassical.
New Keynesian model of state regulation of the economy is based on the theory of John. Keynes. He emphasized the non-discretionary fiscal policy, which, in his opinion, is able to absorb the crisis. Built-in stability is due to the existence of a functional relationship between taxes and national income. Thus, the amount of net tax collected varies in proportion to the amount of net national product (NNP). Consequently, as changes in NNP occur, there is possible automatic fluctuations (increase or decrease) of the amount of tax revenue and resulting budget deficits and surpluses. Anti-inflationary effect is that as the NNP grow revenue producers and automatically increase tax revenues, which eventually leads to the reduction of consumption, restrains excessive inflationary rise in prices, and eventually causes a decrease in NNP and employment. The result is a slowing of economic growth and the formation of the trend towards the elimination of government deficits and surpluses education.
The neoclassical model of tax regulation is based on the theory of "supply-side economics", in which one of the conditions for the growth of savings and expansion of investment activity, a low level of taxes. It uses the concept of fiscal A. Laffer, where the main variable is the marginal tax rates. So, if the marginal rates reach a high enough level, then eliminated incentives for entrepreneurship and the expansion of production, falling profits, enhanced the process of tax evasion, therefore, reduced and general tax revenues. Reduction in marginal tax rates causes the opposite effect.
Thus, the neo-Keynesians are building a mechanism of tax regulation on the basis of changes in the level of taxes as a means of counter-cyclical policies to reduce them in times of economic recession, increase in the years of recovery and recovery to deter business activity, and neo-classical - on the basis of broad-based and targeted to reduce the overall tax to maintain a high level of savings and investment, as well as the expansion of general tax revenues.
Minarik, Joseph J. (2008). "Taxation". In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267.
"Definition of Taxes (Note by the Chairman), 1996" (PDF). Retrieved 2013-01-22.
IMF Revenue Data,2011: Total Tax Revenue as a percentage of GDP
A. B. Atkinson, Optimal Taxation and the Direct Versus Indirect Tax Controversy, 10 Can. J. Econ. 590, 592 (1977)
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