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Public Finance and Fiscal Policy Government Revenue: Taxation (Economic…
Public Finance and Fiscal Policy
Government Revenue: Taxation
Functions
Micro
Correct market failures
due to - externalities
discourage consumption & bring in gov. revenue
Reduce income inequality
redistribute income & wealth by taxing rich proportionately more
complete equality not desirable/practical but responsibility to raise poor's SOL
taxes used to provide essential goods to everyone eg. edu
or provide certain facilities only to lower income groups eg. low cost healthcare/housing, welfare benefits
Macro
Promote actual & potential
growth
raise revenue to finance expenditure in fiscal policy
reduce tax rates in expansionary fiscal policy to :arrow_up:NI by multiplier
tax holidays in supply-side policies to encourage investment
Improve BOT
position
tax rebates for certain industries to develop their comparative advantage
tariffs on imports
Types
Direct
incidence cannot be transferred
to another party
Incidence: eventual distribution of tax burden
depends on relative PED&PES
Impact: party on which tax is levied
personal income, corporate, property etc
Indirect
incidence can be transferred
GST, VAT etc
Systems
Marginat Rate of Taxation = :arrow_up_small:taxes/:arrow_up_small:income
Progressive
%income paid in taxes :arrow_up: as income:arrow_up:
equitable, considers ability to pay
Regressive
%income paid in taxes :arrow_down: as income:arrow_up:
GST, VAT
GST to lower personal & corporate income tax rates while maintaining revenue
heavier burden on poor, who spend larger portion of income on necessities
Proportional
same proportion of income at all levels of income
SG flat-rate corportae income tax + one of the lowest, to attract & keep global investments
Economic Effects
Income
Distribution
Direct
proportional-> distribution unchanged
progressive-> more equal distribution
Indirect
taxes on
commodities less equitable
, lower income groups spend greater proportion
taxes on
luxury goods (progressive)
equitable, higher income groups spend greater proportion
Incentive to
Work
Income Effect
taxes:arrow_up:-> disposable income:arrow_down:
-> cannot afford to consume same amount of goods&services as before
-> work more to
maintain consumption level
Substitution Effect
taxes:arrow_up:-> an hr's work buys less consumption than before but still involves sacrifice of an hr's leisure
->
OC of leisure
:arrow_down:, substitute work for leisure
likely income effect>substitution effect for those who want to
maintain current SOL
or have
long-term commitments
eg. families, mortgages, debts
substitution effect likely to dominate if few commitments/
steeply progressive
tax structure (discourages high income earners)
Consumption
higher propensity to consume-> greater :arrow_down:consumption when disposable income:arrow_down:
low savings-> consumption:arrow_down:
relatively high SOL, can save-> resist reduction in SOL by
reducing saving rates rather than spending
Ability & Incentive to
Save
ability:arrow_down:
if saving for particular purpose, may :arrow_up:work effort to save as much as before
Ability & Incentive to
Invest
ability:arrow_down:
discourages-> hampers economic growth
tax cuts & rebates cost gov. hundreds of millions yearly but bring good jobs and more investments over time
Resource Allocation
resources move from heavily taxed production to lightly taxed one
distorts prices