Question

Question 1.
Taxation, though is now considered a separate field of study, can still be best described as Fiscal Policy tool for public Economic Governance and Financial Accountability for Development. The conclusion of the matter therefore is that "Fiscal Challenges and Debt problem are the results of weak Economic Governance particularly due to the poor strategic Management of Optimal Tax policy from Tue Fiscal/Budgetary Input Dynamics point".

Thus,' the more government income is 'earned', the more likely are state-society relations to be characterized by accountability, responsiveness and democracy. Tax's are therefore the very legal Consideration of the Social Contract for the Fiscal Governance of Modern States". Discuss.

Answer 1

Introduction

Fiscal policy is the use of government spending and taxation to influence the economy. When the government decides on the goods and services it purchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises their disposable income. Discussions of fiscal policy, however, generally focus on the effect of changes in the government budget on the overall economy. Although changes in taxes or spending that are “revenue neutral” may be construed as fiscal policy—and may affect the aggregate level of output by changing the incentives that firms or individuals face—the term “fiscal policy” is usually used to describe the effect on the aggregate economy of the overall levels of spending and taxation, and more particularly, the gap between them.

  In an open economy, fiscal policy also affects the exchange rate and the trade balance. In the case of a fiscal expansion, the rise in interest rates due to government borrowing attracts foreign capital. In their attempt to get more dollars to invest, foreigners bid up the price of the dollar, causing an exchange-rate appreciation in the short run. This appreciation makes imported goods cheaper in the United States and exports more expensive abroad, leading to a decline of the merchandise trade balance. Foreigners sell more to the United States than they buy from it and, in return, acquire ownership of U.S. assets (including government debt). In the long run, however, the accumulation of external debt that results from persistent government deficits can lead foreigners to distrust U.S. assets and can cause a deprecation of the exchange rate.

.Fiscal policy is an important tool for managing the economy because of its ability to affect the total amount of output produced—that is, gross domestic product. The first impact of a fiscal expansion is to raise the demand for goods and services. This greater demand leads to increases in both output and prices. The degree to which higher demand increases output and prices depends, in turn, on the state of the business cycle. If the economy is in recession, with unused productive capacity and unemployed workers, then increases in demand will lead mostly to more output without changing the price level. If the economy is at full employment, by contrast, a fiscal expansion will have more effect on prices and less impact on total output.

Automatic stabilizers—programs that automatically expand fiscal policy during recessions and contract it during booms—are one form of countercyclical fiscal policy. Unemployment insurance, on which the government spends more during recessions (when the unemployment rate is high), is an example of an automatic stabilizer. Similarly, because taxes are roughly proportional to wages and profits, the amount of taxes collected is higher during a boom than during a recession. Thus, the tax code also acts as an automatic stabilizer

But fiscal policy need not be automatic in order to play a stabilizing role in business cycles. Some economists recommend changes in fiscal policy in response to economic conditions—so-called discretionary fiscal policy—as a way to moderate business cycle swings. These suggestions are most frequently heard during recessions, when there are calls for tax cuts or new spending programs to “get the economy going again.

In addition to its effect on aggregate demand and saving, fiscal policy also affects the economy by changing incentives. Taxing an activity tends to discourage that activity. A high marginal tax rate on income reduces people’s incentive to earn income. By reducing the level of taxation, or even by keeping the level the same but reducing marginal tax rates and reducing allowed deductions, the government can increase output. “Supply-side” economists argue that reductions in tax rates have a large effect on the amount of labor supplied, and thus on output (see supply-side economics). Incentive effects of taxes also play a role on the demand side. Policies such as investment tax credits, for example, can greatly influence the demand for capital goods.

Conclusions

Let me conclude

In my remarks I have argued that monetary policy contributes best to macroeconomic stability by anchoring inflation expectations at a level consistent with price stability. A forward-looking, medium-term oriented monetary policy provides the best framework to this purpose. Fiscal policies too should have a medium to long-term orientation and largely rely on automatic stabilisers in the short-term. In specific circumstances, however, discretionary measures may be appropriate when countries are hit by severe recessions or when structural changes in public finances are warranted. But these measures should be well targeted and effective in addressing the underlying causes. Moreover, I have argued that a clear assignment of policy responsibilities, as in the Maastricht Treaty, is truly compatible with the emergence of implicitly coordinated policy outcomes ex-post. In particular, with different policy authorities being responsible and accountable for easily identifiable policy areas, such an assignment is the best possible contribution to Community objectives.

The greatest obstacle to proper use of fiscal policy—both for its ability to stabilize fluctuations in the short run and for its long-run effect on the natural rate of output—is that changes in fiscal policy are necessarily bundled with other changes that please or displease various constituencies. A road in Congressman X’s district is all the more likely to be built if it can be packaged as part of countercyclical fiscal policy. The same is true for a tax cut for some favored constituency. This naturally leads to an institutional enthusiasm for expansionary policies during recessions that is not matched by a taste for contractionary policies during booms. In addition, the benefits from expansionary policy are felt immediately, whereas its costs—higher future taxes and lower economic growth—are postponed until a later date. The problem of making good fiscal policy in the face of such obstacles is, in the final analysis, not economic but