Economic factors: Fiscal policy

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Fiscal policy: The use of taxation and government expenditure to influence the economy. 

Fiscal policy: Taxation allows the government to raise revenue and to influence demand by placing a charge on goods, services or income. It is a withdrawal of money from the economy, in that it tends to reduce total spending and demand. In contrast, government expenditure is an injection of money into the economy&tends to increase total spending/demand

Taxation - There are two main categories of taxation: direct taxation and indirect taxation: 

  • Direct taxaes are taxes on incomes or profits. Individuals earning over a certain income level pay income tax, while businesses pay corporation tax. They are usually levied as a proportion of income or profit
  • Indirect taxes are taxes on spending. VAT at the rate of 20% is charged on most goods/services. Sine giids abd servuces are charged at 5% such as children's car seats and home energy. Some are zero rated such as food.

Because a tax increase effectivelty reduces the spending power of taxpayers, it can be used selectively to target oraticular groups of people or types of spending. For example: 

  • To increase incentives for people to set up their own business, corporation tax for small firms can be reduced 
  • To encourage consumer spending, the rate of VAT can be reduced, leading to a reducation in prices 
  • To deter people from using leaded petrol and thus to reduce enviromental pollution, excise duty on leaded petrol can be increased making it more expensive 

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