Fiscal Policies and Taxation
Uploaded by knife7 on Jan 12, 2006
Macroeconomic Policy Recommendations; Fiscal policies: taxation
The means by which a government adjusts its level of spending in order to monitor and influence a nation’s economy it’s known as Fiscal policy. The federal government’s chief source of funds to cover its expenses is the income tax on individuals, which in 1999 brought 48% of total federal revenues. An argument can be made about the use of taxes as a means to influence the economy. Hence the reason most debates about income tax today as a macroeconomic policy revolve around three issues: (1) the appropriate overall level of taxation; (2) how graduate, or “progressive” the tax should be; and (3) the extent to which the tax should be used to promote social objectives. In fact, some economists-democrats and republicans- have suggested that the economy would fare better if the government would eliminate the income tax altogether and replace it with a consumption tax, taxing people on what they spend rather than what they earn. As a result, we will take a look at consumption tax as a macroeconomic policy to stimulate the current U.S. economy.
On an interview conducted by a news journalist quoting Alan Greenspan, the Federal Reserve Chairman, pointing out the merits of a “consumption tax,” as well as the challenges of setting up such a tax. Greenspan added that, “the consumption taxes could take the form of national retail sales taxes or a value added tax, imposed on the increased value of a good or service at each stage of manufacture and distribution and ultimately passed on to the customer” (fox news online). A consumption tax—also known as an expenditures tax, consumed-income tax, or cash-flow tax—is a tax on what people spend instead of what they earn. Moreover, most of the political debate over a consumption tax has centered on whether the United States should adopt a value-added tax (VAT) similar to the ones that European countries have. While a VAT definitely is a tax on consumption, it is not the kind that most consumption-tax advocates prefer. What's more, the debate over whether to add a VAT to the U.S. tax code has obscured the more basic issue of whether to tax income or consumption. Our contention here is to tax consumption as a means to simplify taxes and stimulate the U.S. economy.
First, proponents of a consumption tax argue that it is superior to an...