Fiscal Policy
Fiscal Policy: taxes, types of policies, automatic stabilisers, discretionary policy.
- Created by: _-Hannah-_
- Created on: 24-03-17 19:41
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- Fiscal Policy
- Fiscal Stance
- Neutral - gov spending and tax has no effect on AD.
- Reflationary - boosts AD by increasing gov spending and decreasing tax
- Deflationary - reduces AD by increasing tax and lowering gov spending.
- Automatic Stabilizers
- Some of a gov's fiscal policy will automatically react to changes in the economy.
- E.g. a recession will make more people unemployed, so the gov will need to pay out more in benefits (JSA).
- But this will create a budget deficit.
- E.g. in a boom, tax increases and gov spending decreases as more people have jobs.
- This creates a budget surplus.
- Discretionary Policy
- Gov's deliberately change their level of spending and tax.
- E.g. during a recession the gov might choose to spend more and cut taxes to stimulate AD.
- Taxes
- Regressive Tax - a person's tax falls (as a percentage of their income) as their income rises.
- Used by a gov to encourage supply side growth.
- Gives the incentive to work harder to earn more income - but may create inequality.
- Progressive Tax - a person's tax rises (as a percentage of their income) as their income rises.
- Often used to redistribute income and reduce poverty. A gov can use the tax rev from a wealthy person and redistribute it to those on a low income.
- Proportional Tax - everyone pays the same amount of tax regardless of income level.
- Can achieve horizontal equity - people who have similar incomes and ability to pay taxes should pay the same amount of tax.
- It is argued that this reduces the incentive to evade and avoid paying this tax and increases the incentive to work in order to earn more and have a higher disposable income.
- Regressive Tax - a person's tax falls (as a percentage of their income) as their income rises.
- Fiscal Stance
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