Fiscal policy refers to the policy under which the government, with the help of its instruments like public spending, public borrowing and taxation can achieve certain objectives of economic policy.
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Any countries’ economy functions on the mentioned aspects of fiscal policy. Thus, it becomes important to have a clear understanding of them so that people can work upon them without needing any extra research.
Public revenue is an income of the government which is received through all its sources. It contains taxes in the form of income and receipts, profits of public sector companies, interest, dividend, revenue from the services provided by the government, etc.
Tax refers to the compulsory contribution which is made by the person to the government so that they can defray the expenses which are incurred for the common interest of all without referring to special benefits which are conferred.
Nature of Taxes that must be taken note of for effective learning: –
- Compulsory contribution:
A tax is said to be a compulsory contribution by the taxpayer to the state on account of ownership of property, income earned and other economic activities which are taken by the taxpayers.
A person cannot refuse to pay the taxes to the government. If a person refuses to pay the taxes, he would be liable to legal actions and would be punished by the government.
- Personal obligation:
A taxpayer has to pay the taxes he or she is liable to pay. The income of a person should not be hidden by him or her and he or she should not try to evade taxes.
- General benefit:
Taxes which the government collects are used by it for the general benefit of the economy. It has nothing to do with the specific benefit received by an individual.
For instance, if a person pays property tax to the municipality does not mean that it would be used for the betterment of the road in front of that person’s house. Rather it would be used for the welfare of the community.
- No Quid Pro Quo:
It means that there is no direct proportionate benefit equivalent to the amount of tax paid to the government. For example, if A pays rupees two lakh in the form of income tax, then he or she would not be able to claim benefit for the equal amount from the government.
The students, while they are studying and understanding concepts to get right guidance, must then understand the types of taxes:
- Direct tax:
Direct taxes are those whose impact and incidence fall on the same person. They are imposed on the income and wealth of a person.
Direct taxes are not transferable as impact and incidence are on one person. For example, wealth tax, corporate tax, income tax, etc.
- Indirect taxes:
Indirect taxes are those whose impact falls on one person and incidence is born by the other person. They are born on the expenditure of a person.
Indirect taxes are transferable as impact and incidence are on both the persons. For example, service tax, GST (Goods and Service Tax), etc.
- Proportional taxes:
Proportional taxes are those in which rate of taxation remains same with the increase in taxpayer’s income.
- Progressive taxes:
Progressive taxes are those in which the rate of taxation increases with the increase in taxpayer’s income.
- Regressive taxes:
Regressive taxes are those in which the rate of taxation decreases with increase in taxpayer’s income.
- Degressive taxes:
Degressive taxes are those in which progressive tax prevails in the early stage of income and then become proportional tax as income increases.
Public expenditure is the expenses incurred by public authorities – central, state, and local bodies for its own maintenance and also for meeting the collective needs of the citizens.
Some case assignment help usa to better understand the fiscal policies importance. For example, public expenditure on education, medical, transport, communication, etc.
Effect of Public Expenditure on Production:
- Public expenditure helps in increasing production in various individuals and firms with the help of purchase of factor services and goods and services from them.
- It can increase production in the economy if the efficiency of the people increases. For example, public expenditure on education, training, medical sanitation, etc. helps in increasing the efficiency of the people.
- Public expenditure can increase production by improving human skills with the help of education, training, research facilities, etc.
Effect of Public Expenditure on Investment:
- The investors are encouraged to undertake investment when the public expenditure on maintenance of law and order helps to create confidence in the minds of the investors.
- It also leads to investment by creating social overheads in the economy.
- Creation of economic overheads such as power, irrigation, training and communication also encourages producers to undertake investment.
Effect of public expenditure on Economic Growth:
- Public expenditure develops economic growth directly by developing social overheads and industrial infrastructure by setting up basic and key industries, etc.
- It develops economic growth indirectly by providing education, training, and research facilities, etc.
Effect of Public Expenditure and Economic Stability:
Economic stability means keeping a check on the booms and depressions in the free market economy.
Booms are a situation of inflation, high level of employment and production activities whereas depression is a situation of deflation and low level of employment.
During boom, the excess demand needs to be reduced which is done by reducing public expenditure. Reduction in public expenditure leads to decrease in money supply in an economy as well as decrease in purchasing power of people.
During a depression, the government tends to increase public expenditure, as a result, money supply in an economy increases leading to increase in purchasing power of people.
The economy of any country is a vital aspect necessary for the proper functioning of the nation. The fiscal policy reflects the efficiency of the government and gives a glimpse to the entire world about the economy of the country being considered. Thus, it becomes important to study and therefore, the students must always keep in mind the points discussed while taking online research.