The Basics of Taxation and How it Works in Economics

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Taxation is a tool of fiscal policy that funds public services and alters prices to control demand. Its purpose is to help pay for government spending and the cost of taxation is absorbed by the seller or buyer. It’s a form of income tax that can be either a positive or negative effect on an economy. This article will discuss the basic concepts of tax and how it works in economics. Also, discover how taxes can be reformed and reduced for the benefit of society.

Taxation is a tool for fiscal policy

Fiscal policy is the use of taxes and spending by governments to influence the economy. Government expenditures influence the economy in many ways, including the prices of goods, social security benefits, and taxes collected. Government spending can be in the form of wages for government employees, smooth roads, or fancy weapons. These spending decisions are often made with the hope that they will spur economic growth. The debate surrounding fiscal policy is as broad and as varied as the policies themselves.

Fiscal policy involves government spending and taxes in order to control inflation and stimulate the economy. For example, a government running a $10 million deficit for three years will accumulate $30 million in debt. In a balanced budget, any change in government spending must be offset by an equal change in tax revenue. This multiplier is always equal to one, lending money a balanced budget. In times of economic turmoil, government spending and taxes may be increased, boosting the economy or dialing back expansion to protect vulnerable groups.

It is used to fund public services

While most people are familiar with the idea that taxes are used to fund public services, many people are unaware of the details of how government operates. While income taxes are a vital source of revenue for most governments, a substantial portion of government expenditures go towards less visible services such as education. In most states, basic services account for less than ten percent of government spending. Hence, tax dollars are used for public purposes, including education, health care, and public safety.

In the past decade, Ohio local governments have lost $1.4 billion in state revenues, after accounting for inflation. Beginning in the 2012-13 budget, Governor Kasich cut funding by more than half. Local governments had already lost half of their Local Government Fund, and many had been stripped of their local tax sources. However, despite the decline in state revenues, motor fuel and gasoline excise taxes have continued to grow slowly in some cities.

It is used to alter prices to affect demand

Taxes are one type of market intervention by governments. These taxes are imposed on the production or consumption of a good and increase the price, thereby moving consumers along the demand curve. The amount of tax that is charged is the vertical distance between the supply and demand curves. As a result, the equilibrium price and quantity are higher, and the tax burden falls on the consumer and producer. In equilibrium, the consumer pays the price (P1) and the producer receives the price (P2) minus the tax.

It is absorbed by the seller or the buyer

Price sensitivity is a key factor in determining whether the burden of tax is borne by the seller or the buyer. If the buyer is price sensitive, it is unlikely that the burden will be passed on to them. On the other hand, if the buyer is price insensitive, the burden will fall on the seller. This is illustrated in the graph to the right. For each of the four cases, the burden of tax is borne by the seller.

The government shifts the demand curve downward by the amount of the tax. When the demand curve is shifted down, the seller does not want to sell as much as the buyer wants to pay. As a result, the price goes up and the seller does not want to sell at that price. As a result, buyers have a shortage, which causes upward pressure on prices. The tax must be absorbed by the seller or the buyer or else the market will go into recession.