* The 50% income tax rate to be scrapped
* The duty of fuel to be reduced
* The VAT on tourism to be cut to 5%
* The passenger duty on flights to be dropped
All four have claimed that as a result:
* The government will receive higher revenue
* Jobs will be created
What are the reasons for these arguments? And does this not imply we should simply cut taxes and solve the economic crisis?
Well on one level these groups are arguing for an old fashioned fiscal stimulus. Lower taxes and raise consumption and so Aggregate Demand. On the other hand they are relying of incentives to change behaviour.
For those advocating the cutting of the 50% income tax rate they suggest people will work harder if they keep more of their wages. This is a supply side measure.
For the other measures its just the law of demand and the proponents are really assuming a lot about the elasticity of demand. More jobs may result, but it seems optimistic to suggest that the government will get more tax revenue due to increased output and sales.
Of course the other interpretation is that the proponents of these tax cuts are all vested interest groups who want a boost to their incomes or their business.
The linked article relates to the latest calls for lower VAT on tourist services.
Reducing tax is a form of fiscal policy that the government believes will help to shift aggregate demand to the right and reduce government revenue. It is true to say that by reducing tax on peoples incomes or VAT for example, will have a knock on effect in the people's consumption. Though they haven't in turn increased their income, it is just that they hvae more of the income they earn to spend. This will mean their will be more demand for consumption goods and so AD shift right, and there's economic growth (in the short run). Tax cuts will more blatantly make the population happier as an economy. Economic growth will increase and so there will be a higher standard of living.
ReplyDeleteWell, a cut in income tax will most definitely increase the incentive for households to consume more, although in this current economic climate, consumer confidence is not very high resulting in less consumption and therefore AD doesn't shift as far. This is noticed in the country's low interest rates which has not been very effective in stimulating growth. But also it states that a cut in income tax will persuade workers to work harder, BUT surely if people are not bothered by gaining more money and are satisfied, they will just work less hours...which could in fact prove costly to the economy. Although the cut in fuel duty and income tax will raise employment due to the fact that firms will have more money to spend on employment which could increase productivity and thus improving international competitiveness - Very Desirable.
ReplyDeleteHow would a fuel duty cut increase productivity?
ReplyDeleteA cut of tax will certainly prompt the consumption levels to rise, shifting the AD curve. But what about the tax revenues that the Government receives from tax? These revenues are fed back into the circular flow via government spending, thus improving society as a whole standard of life with the construction of services like schools and hospitals. However, a cut in tax will improve the quality of life as individuals, as their dispersable income will have increased.
ReplyDelete