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Finpearls > Blog > Economics > FISCAL POLICY: CLAIM VS REALITY
Economics

FISCAL POLICY: CLAIM VS REALITY

Finpearls
Last updated: 2023/11/04 at 4:15 PM
By Finpearls 12 Min Read
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Fiscal policy
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Key takeaways:

  • The government works like an organization, they collect money from the nation and spend it to facilitate them
  • Tax money is principally spent on health, education, defense, infrastructure, and other needs of the nation
  • Direct taxes are collected on the income of corporations and individuals who lie under the tax bracket
  • Indirect taxes are collected through commodities purchased by people
  • Luxury taxes are collected through the items which lie under the luxury category
  • The Government prepared a budget for the whole fiscal year and then collected the tax accordingly
  • Government fiscal policy affects both businesses and individuals directly or indirectly 

The government works like an organization, it generates revenues and spends money to facilitate the nation, but from generating revenue to spending there is a whole long process which is called Fiscal policy, that has to be managed by the state’s administration, and in this article, we will discuss that process of fiscal policy briefly and tell you guys how it affects the common man life. Moreover, we’ll discuss how this system claims to work and how it actually affects your daily lives. This process involves multiple steps, we’ll go thoroughly individually to make it easy to understand. So let’s beg!

Contents
Key takeaways:REVENUE GENERATION:DIRECT TAXES:INDIRECT TAXES:LUXURY TAX:BUDGETING AND SPENDING:EFFECTS OF FISCAL POLICY:CONCLUSION:

REVENUE GENERATION:

To spend money on the nation’s health, education, security, infrastructure, and other facilities, the government needs money, it is obvious that this money will come from the citizens’ income, the government claims to take money from your pockets and spend it on your livelihood in the country. The revenue they generate is mostly by “tax”, Tax is the amount of money the government charges the people to spend for the betterment of the nation, so they take plenty of money from you on the basis of your income and spending and become a so-called Robinhood “who takes money from high-income and spending individuals and give it to needles or low-income individuals”. They tax the nation on the basis of what they make annually but at the same time, they grant loopholes to Billion-dollar firms for tax invasion, in this way, the bigger fishes find their way out of taxation and the salaried class or working class gets a burden. Things don’t stop here, the huge firms, mills, and factories that provide the majority of goods and services to the nation may pay fewer taxes but they help the government to facilitate the poor and middle class of the nation through their three generous offers and those are:

  1. They grant loans to the government: Yes, these generous big fishes grant loans of millions to the government to fulfill the deficit in the fiscal budget although the government gives tax exemptions of billions to those firms. Moreover, these firms and big fish grant donations to their favorite government candidate at the time of elections as an investment to get returns later
  2. They give cheap goods to the nation on government request: Yes, you read correctly, this request of the government is called subsidies, when essential goods like sugar, wheat, medicines, etc. Get expensive government pays a certain percentage of those goods cost to big firms so they can sell you at cheap rates, but do you know where that money came from? The tax revenue that the government collects from the middle class and pays to big firms becomes Robin Hood in a parallel world
  3. They create jobs for the middle class: Another generous move of Big Fishes is that they create jobs for skilled and unskilled labor, but due to a small budget of salary expenses they failed to pay the minimum wage set by the administrative body of the country, and when their profits get hit a little they start downsizing instantly and create unemployment chaos

After a little overview of the government taxation procedure, we will discuss what type of tax collection method the government used to tax people, and those are:

DIRECT TAXES:

Direct taxes are the taxes the government charges on the basis of income, the government sets the annual earning brackets and tax the people on the basis of annual earning, the government always tries to increase these taxes to generate revenue from the rich people of the country and spend on the poor so there will be a balance in the economy, but unfortunately, these sugar-coated words are just standards not being followed successfully due to poorly designed tax laws. Big corporation and rich people manage to escape the taxes and the salaried class get trapped and carry the burden of the entire nation’s expenditure requirements.

INDIRECT TAXES:

These taxes are imposed on every good and service utilized by a common man such as groceries, utilities, electronics, etc. It doesn’t matter how much you earn if you buy the goods you need to pay the tax, this type of tax shows the government’s inability to collect tax from the rich so they tax the whole nation to fill the deficit. So clearly government first burdens the salaried class with direct taxes then they tax the whole nation to fill the pit they make. Again, rich don’t get bothered because they saved billions in direct taxes and need to spend millions in indirect taxes

The ideal situation is for the government to collect its major tax from the corporations to balance and smoothen the economy

LUXURY TAX:

This tax once again displays the incompetence of the state administration, when the state fails to tax the rich and spend for the poor due to the deficit, then they impose a luxury tax on the goods that fall into the luxury segment and fulfill the deficit in the collection, they already help rich to save plenty of money and then this tax is on limited imported items which rich buy rarely, so they don’t have any problem to pay some extra bucks for that

BUDGETING AND SPENDING:

The principal way of generating revenue is a tax, after the collection of the tax the government prepares the budget for the fiscal year (from July 1 to June 30), this budget contains the estimate of the spending of the whole year which includes health, education, defense, development, and loan repayments (if any). There can be a budget deficit or surplus, in case of a budget surplus government has extra money even after spending on the other hand budget deficit refers to the gap between revenue and expenditure, and to fill that gap government uses a few methods:

External loans: The government needs to pay for the expenses of the nation and due to their incompetence, they failed to make the economy prosper and collect an adequate amount of tax so they ask international organizations like the International Monetary Fund, The World Bank, Asian Development Bank, and other organization who bailout the suffering economy. But this doesn’t stop here, those loans must be repaid along with interest, and the economy which is already facing a deficit adversely affected by these so-called bail-out packages the deficit widens every year so the government takes new loans pay off the interest and principal amount of previous loans

Internal loans: The government uses this method to fulfill its money requirement by issuing bonds, printing more money, and signing debt contracts with energy firms to fulfill the requirements of the nation, this may relieve the government in the meantime but hits back when the payment time arrives again government gets in tight spot

EFFECTS OF FISCAL POLICY:

The fiscal policy affects the corporations and the common man’s life as well because when the government increases the tax whether direct or indirect it reduces the money supply in the market, which is called “Contractionary fiscal policy” and when the government decreases the tax it increases the income of the people and the money supply as well, it is called “Expansionary fiscal policy”

In both cases sometimes government uses these fiscal tools to run the economy smoothly so they can generate enough revenue to spend for the people and promote industries by using tax amnesty schemes for the adequate growth of the economy. But most of the time government fails to do so and the nation suffers from the poor decision-making of some authorized people, due to deficits government can’t reduce taxes, and by granting tax relief nor individual neither industry can prosper because huge tax rates reduce the money supply in the economy.

CONCLUSION:

The fiscal policy has great significance in the economic prosperity of the country, but the country cannot properly economically until honest and competent people manage and make fiscal decisions, from east to West most countries in the current world are suffering from poor economic decisions, and governments are busy in corruption, using tax money on wars, poor distribution of resources, etc. Governments mean to work to maintain balance in the economy but unfortunately, they’re busy widening the gap between haves and have-nots and such steps eventually hit the working class the most. That’s why we say:

Government is the Robin Hood in a parallel world

THANKS!

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TAGGED: direct tax, external debt, fiscal budget, Fiscal policy, government, government spending, indirect tax, internal debt, tax, tax revenue
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