Question

The Fijian government has been recently holding budget consultations around the country. In June 2019, the government will come up with an expenditure and revenue plan. What kind of goods and services should the government tax if we wish to maximize our revenue collections for the upcoming fiscal year? How will be the tax burden shared between ordinary Fijians and firms? Explain your answer.

Answer 1

Where the government is trying to increase revenue, & price elasticities of demand for various products differ, then there is an efficacy case for levying high taxes on those products with lower price elasticities. This will usually imply higher taxes on necessities. In contrast , if the state is concerned about equity, & doesn’t have an effective direct taxation & benefit system to obtain redistribution, then there’s a case for levying lower taxes on those products which take a larger portion of the budget of the destitute. However, where there are effectual progressive direct taxations & benefits available, these will do a superior job at redistributing. In this situation, differential commodity tax will allow more redistribution only where commodity procurements reveal something regarding effort. Lower tax on goods which are complementary to work may enable more effectual redistribution. There are some clear-cut cases where there should be deviances from uniformity—levies on environmental harms, & on products like tobacco which can have damaging impacts on the user and on other persons, are the obvious instances.

There are motives other than equity for preferring differential taxation rates, including a desire to tax the utilization of products linked to work more lightly. This is likely to give a powerful case for a low VAT rate on childcare

Economic efficacy is best served by taxing consumption items & not by taxing produced inputs / transactions as such