Question

What is a downside of a state finance system that involves the practice of recapture?

Answer 1

                        Recapture is a condition that is set by the seller of the asset that allows the seller to recapture the asset within a certain period of time at situations of necessity. In economic and finance term, recapture has many definitions by which it may also mean the process of adjusting the taxable income higher due to certain reductions that may be given in the previous period. Considering the state finance system, we can see that this definition of recapture fits in to it. Here, it is stated that by the process of recapture, the state finance system would charge from the people a higher tax rate due to some reduction in the taxation of previous years. The following are the downsides of such a process in the financial system of a state

· As the taxation gets increased, the number of people paying the taxes would decrease, which may result in lowering the overall tax revenue of the state government.

· The advantages of consumers in the economy due to the reduction in the previous years may be affected which may result in lower confidence in the working of the state financial mechanism and thus may affect the investments patterns in the economy

· As taxation rate is increased, it may cause a direct reduction in the investment pattern of the people and hence may affect the total revenue of the state financial system.

· The state administration runs on the tax revenue and any overall fall in the same would affect the total working of the state financial system and thus the administration of the state and the economy may get affected in the process.

All the above are the major effects of tax recapture on the state financial system and thus these can be looked in to before induction of such policies in the state.