"Statistically,90 out of 100 Russians agree with government's fiscal policy,other ten ALWAYS support the government....
Other 150 millions have never been asked"...
That is how people look at the fiscal policy in Russia. In the UK the situation is quite different.
Should taxation patterns be changed in order to both stimulate the economy and improve economic performance?
As everybody knows the UK is now moving to( or already is in) the recession. There was a great decrease in consumers' confidence and, as the result of this, slowdown in the aggregate demand. So what should the government do to deal with that?According to Keynesian economics, the government is supposed to decrease taxes and increase government spending. This is likely to increase real disposable income and make an injection in the aggregate demand(which,as everybody knows equals to consumption+investment+(exports-imports)+government spending).
T
his(the boost of the Aggregate demand) is likely to increase inflation (if the economy is working near to full capacity) but it is also likely to increase GDP (if the economy is not working at full capacity). Furthermore this is likely to decrease unemployment(because demand for labour is a derive demand from demand for goods) but may lead to an increase in imports(because if people spend more all in all, they will spend more money on imports as well).
In the current situation GDP is forecasted to fall by almost 4% so we can assume that the economy will not be working near to full capacity. Inflation is also expected to fall below 2% , so the increase in price level will be only a positive point to the economy.
This stuff is all about fiscal policy and that is likely to work but if the government wants fiscal policy to work properly, it should maintain good tax system.
Good tax system should be:
- Flexible or in another words easy to adjust.
- Efficient.
This means that good tax system should not be the reason for such negative effect as,for example, discouragement for workers or reducing investment-incentives for firms.
- Economic.
Tax burden for the whole economy should be kept as low as possible.
- Equitable.
Everybody should be equal in paying the taxes.
- Certain.
Taxes should be easy to collect and the money spend on it should not be a high proportion of the total tax collected.
Some of these concepts are rather technical so it's quite hard to talk about them without knowing the whole system. Others are more interesting from the economic point of view.
Efficient tax system (and fiscal policy) should provide incentives for workers. Most of the economists suppose that high income taxes discourage people from seeking the work so the government tries to switch from the direct taxes to indirect. In recent years UK's income tax made 29% of the total tax collected so income tax is not quite high but still almost two times greater than VAT for example. Direct taxes seems to be quite low what is likely to encourage people to work(and to seek for the work as well) but still there are great number of benefits that act as an incentives to stop work.
Tax burden of the UK also doesn't seem to be a problem. "Taxation as a percentage of GDP in 2003 was 56.1% in Denmark, 54.5% in France, 49.0% in the Euro area, 42.6% in the United Kingdom, 35.7% in the United States, 35.2% in The Republic of Ireland, and among all OECD members an average of 40.7%"
Government also tries to redistribute the income within the population(as it is supposed that poorer spend greater proportion of their income) and the tax system is one of the tools to do that. The taxes in the UK seem to be progressive what is supposed to smoothen the distribution of income.So for the reasons given above I believe that today's taxation system is good enough and it is likely to improve the economic performance.
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