22 Fiscal Policy Flashcards
Fiscal Policy
The taxation & government spending to influence aggregate demand for the government to achieve their macroeconomic aims.
Budget
An annual statement for the government to outline plans to manage spending and tax revenue.
Budget Surplus
When tax revenue exceeds government spending
Budget Deficit
Happens when government spending exceeds tax revenue.
Balanced Budget
When government spending equals tax revenue/government revenue.
Cyclical Deficit
Budget deficit caused by a fall in economic activity.
National Debt
Total amount of government debt. It is expressed as a percentage of GDP. It is related with budget deficit & surplus. National debt tends to increase when government spending exceeds tax revenue. There also may be a tendency for governments to increase spending compared to its tax revenue when there is an economic boom.
Indirect Taxes
Taxes on the sale of goods and services. They are called indirect taxes because they are payed by consumers but are collected by the firms that supply it. Then the firms are legally responsible to pay the taxes to the government.
The more inelastic the price is the higher of the proportion of the tax that is likely to be passed on to consumer.
Ad Valorem tax
Taxes based off the price of a product.
Direct Tax
Tax from income/wealth. Two examples of direct taxes are: income tax(tax on the income of individuals) and corporate tax (tax on profits & firms).
Advantages of indirect tax:
- They can be changed if needed and its quicker and easier to do so
- Cheaper to collect than direct taxes bcs firms do the administrative work.
- They can be used to reduce consumption(sinful tax) of particular products.
- Can increase taxes without discouraging people since direct taxes may demotivate workers since their income/wages will be less.
High direct tax could cause
Tax evasion & tax avoidance
Tax Evasion
Illegal non-payment or underpayment of tax.
