Question

The state of Texas is experiencing the ravages of the covid-19 pandemic and the collapse of the oil industry simultaneously. The stresses on local budgets are growing. Now, consider yourself a local government official in your city. The city needs to raise more revenue to address a major increase in homelessness. In 300 words minimum, What would be your approach to this challenge? Discuss.

Answer 1

The Covid 19 Pandemic has caused major stress across the United States as establishments remain shut and domestic consumption remains extremely low as a result of which the local demand for goods and services has shrunk to a very low level and the risk of unemployment in the country is rising substantially as producers would look to reduce their costs of operations as much as possible.

Further, the government is going through a tough time as collection of taxes in the state of Texas would be low due to the subsequent reduction in oil prices globally due to sluggish demand.

Now, when we look at the available options for the government on maintaining the revenue on one hand and dealing with expenses on critical items such as health care there is a two step approach which the Texas government may follow in order for it to be able to earn higher tax revenues for itself.

1) Higher Spending on Health Care Facilities:-

The first and foremost task for the government is to be able to increase the number of establishments that are shut, If the aggregate supply goes down beyond a certain limit revenue will suffer no matter what tax policy is applied in the economy.

The current conditions demand, reopening of establishments which is only possible with an increase in health care initiatives to keep aggregate spending in check. As more and more establishments open up and the aggregate supply is then corrected, the economy will return back to its normal state and the country will have more revenue options available for itself.

The source of fund, for achieving this could be from reserves which the government holds, or directly through debt financing wherein a country chooses to issue bonds and collects money from the public or from banks or other foreign institutions for the same.

We have largely seen that in the Untied States numerous packages have been formed, to ensure that the health care is better and countries such as New Zealand have largely been capable of reopening their economy through this very strategy which has helped them in their income as well.

2) Increasing taxation on other areas and having strict penalties:-

The government should try and maximize its revenue by having strict penalties against any and every arrears which people have accrued over the years. Another technique is to enhance taxation on critical areas such as Housing and income of the elite and rich in the country. This would ensure that tax collections remain stable. Also fines and penalties on those who have previously defaulted in tax and are of willful nature should also be charged at a higher rate to increase the revenue for the government.

Penalizing tax offenders and charging the rich is a popular method of the government having sufficient revenue to be able to spend and reduce unemployment risk which results from low aggregate demand and supply in the economy.

Please feel free to ask your doubts in the comment section if any.