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FISCAL POLICY:

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FISCAL POLICY:

Fiscal policy refers to the government measures on taxation, public borrowing and public expenditure.

Elements of public finance: Expenditures Income Borrowing

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Surplus budget: When tax revenue is more than government expenditure (T>G).

Deficit budget: When tax revenue is less than government expenditure (T<G).

 

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TAX: Taxes are general compulsory contribution of wealth levied upon persons, natural or corporate, to defray the expenses incurred in conferring common benefit upon the residents of the state.

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Incidence of Tax: Incidence of tax means the final resting place of the tax. Impact of tax is on the person who is finally bearing the tax

  Impact of Tax:. Impact of tax is on the person who is initially paying the tax.

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DIRECT TAX:

is a tax whose impact and incidence is on the same person, e.g. Income tax, wealth tax, gift tax etc.

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Merits of Direct Tax:

Equitable Economical Certain Elastic Civic consciousness Reduction of inequalities  

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Demerits Of Direct Tax:

Inconvenient Unpopular Evasion Arbitrary

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INDIRECT TAX :

is a tax whose impact is on the one person while incident is on the other, e.g. Custom duties, excise duties, sales tax etc.

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Merits Of Indirect Tax

Convenient No evasion Equitable Beneficial social effects Capital formation Wide coverage Productive

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Demerits of Indirect Tax:

Uncertain Regressive No civic consciousness Uneconomical Inflationary Evasion Loss of economic welfare

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PROPORTIONAL TAX:

In case of proportional tax the tax rate remains same for all the levels of income, e.g. T.V. license.

.

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REGRESSIVE TAX:

Is a tax for which the rate increases with the decrease in income, e.g. Indian salt tax.

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Proportional Tax

Merits Of Proportional Tax: Equitable Demerits Of Proportional Tax: Not equitable Not sufficiently productive Arbitrary

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PROGRESSIVE TAX:

  Is a tax for which the rate increases

with the increase in income, e.g. income tax.

 

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Merits Of Progressive Tax:

MU of income and tax Discourage luxuries More productive Economical and flexible Contra-cyclical and stability Reduction of economic inequalities

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Demerits Of Progressive Tax Arbitrary Discourage savings MU of money may not hold good Encourage idleness Leads to tax evasion Discourages investment

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CANONS OF TAXATION:

Adam smith’s canons Canon of equity Canon of certainty Canon of convenience Canon of economy

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Other canons

Fiscal adequacy and productivity Elasticity Simplicity Diversity

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FISCAL POLICY TO ACHIEVE MACROECONOMIC OBJECTIVES

Growth: According to Classical economists

expansionary fiscal policy adds to inflation while the Keynesians argue that during the depression, expansionary fiscal policy (increase in Govt. Expenditure and reduction in Tax rate) shifts aggregate demand (AD) outwards which increases the economic growth.

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FISCAL POLICY TO ACHIEVE MACROECONOMIC OBJECTIVES

(b) Unemployment: Keynesian Economist argue that

increase in government Expenditure and reduction in tax rage (Expansionary Fiscal Policy) would shift AD outward which results in reducing unemployment in short-run as well as in long-run.

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FISCAL POLICY TO ACHIEVE MACROECONOMIC OBJECTIVES

Inflation: Tight Fiscal policy (reducing Govt.

Expenditure and increasing tax rate) will help controlling inflation.

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(d) Balance of Payment:

Tighter fiscal policy reduces AD and demand for imports will fall. The current account balance will then improve

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SOURCES OF REVENUE FOR A GOVERNMENT

(a)Tax Revenue. (i) Direct Tax.

Income Tax. Gift Tax. Property Tax. Wealth Tax.

(ii) Indirect Tax. Excise Duty. Custom Tax. Sales Tax

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SOURCES OF REVENUE FOR A GOVERNMENT

(b) Non-Tax Revenue. Price Fee Fine Forfeiture. Grant and Gift.

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Difference B/w Public and Private finance

1) Balancing Income Expenditure,2) Time Span.3) Acquisition of loans.4) Extraordinary Changes.5) Future Planning.6) Surplus Budget.7) Issue of Currency.8) Publicity of Finance.9) Record of Finance.10) Grant and Foreign aid.