Macroeconomics (Lecture 7) Fiscal Policy ( (Taxation and revenue, .Most…
Macroeconomics (Lecture 7) Fiscal Policy
.Most governments have higher spending than revenues and are indebted.
.But taxation and spending do not have to balance since government can borrow (or accumulate assets).
.Countries with higher spending tend to have higher tax revenues, as government needs to finance their spending.
Tax revenues and government spending
Most countries have higher spending than tax revenues.
Government debt and deficits
.However for wealthy/ high income earners, a Laffer curve
does operate (e.g. football players)
.Tax cuts led to huge deficit.
.Reagan tried it out in practise:
.Politicians love “voodoo economics”
.It is likely to be very high-estimates suggest above 75%.
.Yes, beyond a certain point, higher tax rates bring in less revenue.
Is there any truth behind the Laffer curve?
The Laffer curve
-If these supply effects are strong, then cutting taxes may increase revenue-‘VOODOO’ economics!
Brightest people and firms might leave the country
They spend their time trying to avoid tax
People work less hard
High rates of tax on earned income discourage productive effort because:
While low taxes don’t produce much revenue. Do high taxes necessarily produce high revenue?
Taxation and revenue
.Tax revenue is a key constraint for developing countries.
.Collective spending appears to be a “luxury” good, as incomes increase, we tend to expand an increasing proportion of it, collectively
.Beyond that, the level of spending is a question for political choice about the level of collective provision
.Certain level of spending required for national defence, law and order, basic education, etc...
.Public spending is 30% in Korea, 35-40% in US, 45-60% in Europe.
Why do some governments spend more than others?
In the U.S., transfers account for almost half of the federal budget.
This number is even higher in Europe (almost 60 %).
Transfer payments. Do not contribute to GDP.
Support for families
Redistribution of income between individuals :
Current expenditure on goods and
services and public investment.
Part of value added = GDP.
Education and health
Law and order
Collective provision of goods and services,
Motives for government spending :
I. Public Spending and Revenue