26. IGCSE ECONOMICS 0455: C26 FISCAL POLICY

Summary

The video explains fiscal policy, focusing on taxation and government spending to influence aggregate demand and achieve macroeconomic goals. It outlines characteristics of a good taxation policy, differentiating between regressive and progressive taxes. Direct and indirect taxes are discussed, highlighting their advantages and disadvantages. The video further examines the roles of government spending in economic growth and employment, distinguishing between expansionary and contractionary fiscal policies. These policies aim to balance economic growth, inflation, and income distribution, emphasizing the impacts of taxation and government expenditure on the overall economy.

Takeaways

• 😀 Fiscal policy is a government tool involving taxation and spending to influence aggregate demand and achieve macroeconomic goals.
• 😀 A good taxation policy should be equitable, certain, convenient, economical, flexible, and efficient, ensuring fairness and ease of implementation.
• 😀 Regressive taxes (e.g., GST) decrease in percentage as income rises, while progressive taxes (e.g., income tax) increase as income rises.
• 😀 Direct taxes are taken directly from income, profits, and wealth, and can redistribute wealth from higher-income to lower-income individuals.
• 😀 Direct taxes can discourage investment and work motivation if too high, and people may attempt to evade them.
• 😀 Indirect taxes are paid by consumers on goods and services, often passed on by producers, and are easier and cheaper to collect.
• 😀 Indirect taxes can disproportionately affect the poor, increase prices, and lead to inflation, but are harder to evade and useful in certain contexts.
• 😀 Tax incidence refers to who bears the tax burden, and its distribution depends on the elasticity of demand for a good or service.
• 😀 Inelastic demand allows producers to pass more tax burden onto consumers, while elastic demand results in producers absorbing more of the tax.
• 😀 Expansionary fiscal policy involves increasing spending or decreasing taxes to stimulate economic growth, reduce unemployment, and address inflation.
• 😀 Contractionary fiscal policy aims to reduce inflation and balance of payment deficits by decreasing spending or increasing taxes.

Q & A

What is the primary purpose of fiscal policy?

The primary purpose of fiscal policy is to influence aggregate demand through government taxation and spending to achieve macroeconomic objectives.

What are the characteristics of a good taxation policy?

A good taxation policy should exhibit equity, certainty, convenience, economical efficiency, flexibility, and efficiency in improving market performance.

How does a regressive tax differ from a progressive tax?

A regressive tax is one where the percentage of tax paid decreases as income rises, such as GST or VAT, while a progressive tax increases as income rises, such as income tax and property tax.

What are the advantages of direct tax?

Direct taxes help in the redistribution of income and wealth, providing a good source of revenue for government spending on public services like schools and hospitals.

What are some disadvantages of indirect tax?

Disadvantages of indirect tax include being regressive, increasing the prices of goods and services, potentially leading to wage demands from workers, and having less certain revenue due to reliance on spending patterns.

What does the incidence of tax refer to?

The incidence of tax refers to the distribution of the tax burden between producers and consumers, determining how much each party is responsible for paying based on demand elasticity.

What is the role of government spending in fiscal policy?

Government spending, especially on infrastructure and public services, is a fiscal policy tool that stimulates economic activity by increasing demand, which encourages firms to produce more and hire more labor.

What is expansionary fiscal policy?

Expansionary fiscal policy involves increasing government expenditure or decreasing taxes to boost economic growth, reduce unemployment, and improve the balance of payments.

What are the potential negative effects of expansionary fiscal policy?

Potential negative effects include worsening the balance of payments if consumers increase imports due to lower taxes and potentially widening income inequality if government spending disproportionately benefits higher-income groups.

What is contractionary fiscal policy, and when is it used?

Contractionary fiscal policy involves decreasing government expenditure or increasing taxes to lower inflation and address balance of payment deficits. It is used to reduce aggregate demand and stabilize prices.