Question

What is the role of taxes according to the Keynesian (Circuit theory) view? Are they a source of revenue for the government? How do they destroy money?

Answer 1

Taxation plays an important role in the market affecting both the Consumption and Investment of the public. High level of taxes reduce the disposable income with the public and thus their consumption also reduces. On the other hand, low level of taxes increase the level of consumption.

Taxation also affects the investment based on the tax incentive received. If there is high incentive received on investment based on tax exemption, there would be high level of investment by the public. Whereas, in the absence of any incentive, the level of investment also reduces.

Taxes are the biggest source of revenue for the government. Government receives revenue through direct taxes like Income tax and indirect taxes like GST and Customs duty.

when Banks give loans, the money is created. At the same time, when the loan is repaid, the money is destroyed. As most of the money in the economy is in the form of liabilities as bank deposits, so when the deposits are repaid, the money is destroyed.