Chapter 1. Concept, types and purposes of fiscal policy

Chapter 1. Concept, types and purposes of fiscal policy

 

 

Fiscal (budgetary-tax) policy is a system for regulating the economy through changes in government spending and taxes. Taxes and Government spending are the main instruments of fiscal policy. Fiscal policy may as well beneficially and quite painfully affect the stability of the national economy.

Fiscal policy, also known as a financial and budgetary-financial policy, widespread its activity to the major elements of the State Treasury (Fisk). It is directly linked with the State budget, taxes, government monetary income and expenditure. In a market economy it is the basic part of the State economic. Fiscal policy combines budgetary, tax, revenue and expenditure policies.

In General, fiscal policy is reflected in the state activities of the financial administration organization, using of them to solve the socio-economic problems of the country. Fiscal policy applies to mobilize, attract the necessary funds, its distribution and use them by its function.

One of the main purposes of fiscal policy is to find sources and ways of forming centralized state monetary funds, which allows achieving the goals of economic policy. Through fiscal policy the State regulates global economic processes in the country, supports sustainability of finance, money circulation, and provides financing of the public sector, helps to use better productive-economic and scientific - technological potential. Instruments of fiscal policy is used by the government to have an impact on aggregate demand and aggregate supply, thus affecting to the overall economic situation, ensure stabilization of the economic situation, to conduct counter-cyclical measures against excessive fluctuations of economic parameters, which threaten by the  emergence of crisis.

The share of public sector expenditure on goods and services is very high, the State acted in the market as the largest buyer, spending during the year such amount of money that make up the amount of component part of gross domestic product in economically developed countries. Buying is realized by the State both domestically and in foreign markets. Thus, the state has an enormous potential to impact on the volume and structure of aggregate demand, unless it didn’t tied up itself by hands and feet in advance due to severe restrictions.

In addition, the state is capable of indirectly affect to demand from businesses and households, biting or stimulating it through taxes and transfer payments such as pensions, benefits, scholarships.

In normal economic development, the Government should have strategic and precise programs in the field of employment in order to effectively use it in a recession, when people lose their jobs. Employment programs are usually quite flexible. They are very efficient in the sense that unlike public works programs require less costs and can be applied by local authorities at a local market.

Expenditures on social programs include pensions, various assistance programs for the poor, education, medicine, and so on; these programs enable you to stabilize economic development, when declining incomes. The main disadvantage of all these programs is that they are in a recession and it’s hard to undo when the economy is booming.

Changes in tax rates, from this point of view, is a more effective tool in an effort to stabilize the economy. Thus, reduced rates of income tax in the blip may retain revenues decline, thereby preventing crises by increasing consumer spending. But there is a downside here. Temporary tax cuts are not always acceptable to fight the recession, as in a democratic society are generally more difficult to raise taxes after overcoming the recession, it is much easier to organize political sentiments in the fight against unemployment than to fight the inflation gap and over employment.

The deliberate manipulation of taxes and expenditure is the active fiscal policy.

PASSIVE fiscal policy is a policy where necessary changes in levels of public spending and taxes are entered automatically.

The process of rapid development of the economy is the creation of an enabling environment for enterprises and organizations. To some extent this is due to the improvement of the tax regime.

Transition from survival to the strategy of sustainable high rates of economic development requires the enhancement of mechanisms for regulating the process of redistribution of income between the State, citizens and enterprises. The relevance of this problem is that the Foundation for economic growth the industry held by extraction and primary processing of raw materials. The products of these industries are more than 70% of industrial production and exports.

Purposes of fiscal policy:

1. Smoothing of fluctuations of economic cycle;
2. Ensuring high employment and moderate rate of inflation;
3. Stabilization of economic growth

Types of fiscal policy:

1. Discretionary
2. Automatic

Under the discretionary fiscal policy is a deliberate management of State taxation and public expenditure in order to influence the actual volume of national production, employment, inflation and economic growth.

Effective discretionary fiscal policy presupposes sound diagnosis of economic processes on the basis of which the Government adjusts its levers: taxes and public spending on projected economic conjuncture. But knowing what became of macroeconomics, trends have failed completely. Therefore, the Government cannot always predict the actual direction of the economy, which forces him to make decisions on setting up fiscal policy with the famous late. A time lag between the need to adjust economic instruments of fiscal policy and decision-making by the Government.

Delay action necessary levers of discretionary policy is also related to the normal administrative procedures for the Organization of activities arising from the new economic policy.

The effect of the adoption of a new fiscal policy usually comes not at once, because investing in the development of production recovered after a large period of time.

Marked lag time-lags between the period of need for new directions of fiscal policy and the expected positive impact of their application are stacked on top of each other. This, of course, affects the possibility of discretionary fiscal policy be set up quickly to developments in the economy and effectively their corrected.

In the period of recession stimulating discretionary fiscal policy consists of:

1. Increasing of state expenses;
2. Decreasing of taxes;
3. Combination of increasing of state expenses with decreasing of taxes;

Such fiscal policy in fact leads to deficit financing, but provides reduction of declining of production.

During the inflation, caused by excess demand discretionary fiscal policy formed by:

1. Decreasing of state expenses;
2. Increasing of taxes;
3. Combination of decreasing of state expenses with increasing of taxes;

Such fiscal policy oriented on positive balance of budget.

In practice, the level of public expenditure, tax revenues may change even if the Government does not take the relevant decisions. This is due to the existence of internal stability, which determines the automatic (passive, nondiscretionary) fiscal policies. Built-in stability is based on mechanisms that operate in the mode of self-regulation and automatically respond to changes the State of the economy. These are called embedded (automatic) stabilizers. Refer to them:

1. Changes in tax revenues. Amount of taxes depends on the income of the population and businesses. During the recession, production will decrease revenues, which automatically reduces the tax revenue to the Treasury. Therefore, to increase revenues, the remaining population of enterprises. This will somewhat slow down the decline in aggregate demand, which results in the development of the economy.

The same effects and the progressiveness of the tax system. With a decrease in national production is declining revenues, but at the same time reduced and tax rates which accompanied by a decrease in both absolute amounts of tax revenue to the Treasury, and their share of the income of the society. As a result of the fall in aggregate demand will be more lenient.

2. The system of unemployment benefits and social benefits. They also provide automatic countercyclical effects. Thus, an increase in the level of employment leads to higher taxes, from which unemployment benefits are financed. With the decline of production increases, the number of unemployed, which reduces aggregate demand. However, at the same time grow and the amount of unemployment benefits. It supports the consumption slows decline in demand and thus opposed the growing crisis. In the same automatic indexing system operating income, social benefits. There are other forms of built-in stabilizers: program of assistance to farmers, corporate savings, personal savings, etc.

Built-in stabilizers soften changes in aggregate demand and thereby stabilizing production of national product. It was through their action has changed the development of the economic cycle: production became less deep recessions and shorter. Previously, this was not possible because tax rates were lower and unemployment benefits and social benefits are insignificant.

The main advantage is not a discretionary fiscal policy that its tools (built-in stabilizers) are immediately at the slightest change in economic conditions, i.e., there is little time lag.

Lack of automatic fiscal policy in that it only helps to smooth cyclical fluctuations, but cannot fix them. It should be noted that the higher tax rates, the greater the transfer payments, so more efficient than discretionary policy.

Embedded regulator automatic policy or fiscal policy, it is understood the economic mechanism that automatically responds to changing economic situation without having to take any steps by the Government. The main built-in stabilizers are:

1. Changing in tax earnings, amount of taxes depends on volume of income; in the period of dynamic growth of GDP, amount of tax earnings automatically increase, it provides reducing of purchasing abilities and restraining of economic growth.
2. System of unemployment allowances and different social payments, programs of maintaining of low-income strata.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 2. Tax policy as the instrument of fiscal policy

 

Tax policy is a part of fiscal economic policy in determining types of taxes, tax rates, tax objects, environment taxes, tax incentives. All of these options the State regulates so that receipts from taxes provided funding from the State budget. But it has to meet with the principal contradiction of tax and fiscal policy.

The tax policy of the State is not only the revenues to the budget, but also with structural-investment policies. Regulating taxes, tax rates, tax incentives, Governments can stimulate the development of certain industries, have an impact on consumption patterns, promote investment in the economy.

The economic essence of taxes is money, folded State legal entities and individuals. These money are objectively and have specific public appointment – mobilization of funds available to the State, so the tax can be regarded as an economic category, with its two functions – fiscal and economic. Using first a budgetary Fund; realizing the second State affects the reproduces by stimulating or inhibiting its development, strengthening or weakening capital accumulation, increasing or decreasing the effective demand of the population.

Our young sovereign State makes its first steps in fiscal policy. From a clear understanding of what should be the tax system is dependent on the success of the tax laws of the State.

Tax system must satisfy following requirements:

• Stability of tax system;
• Order of tax payments (it make it easier to control timeliness and fullness of tax payments );
• The privileges of the final product, but not production factors (with giving privileges after verification of presence of privileged values’ practical effect). The problem of tax reform is closely related with problem of stimulating productive investment. Such relation was due to the fact that in the frames of fiscal and credit policy a system of credits and other economic measures, which are aimed on stimulating of investment in production, are form;
• Subordination of local and state taxes. (delimitation of state and local tax spheres, exceptional arbitrariness in forming of all administrative hierarchy’s levels’ resources, it is guarantee of its independent development);
• Equality before the law of all taxpayers, uniformity of tax policy (achieving of  great uniformity  facilitates satisfying the other criteria of successful tax policy, it helps to simplify taxes and this is contribution to their neutrality);
• Legislative right of taxpayer on information (tax system should show people the price of the different activities of the state, which commit in different scales so that decisions of politicians, like how and where spend money, supported by the readiness of taxpayers to pay for these practical action);
• Simplicity of tax system (method of real simplification – significant reorientation of tax policy from needs of individual taxpayers to wide and general rules, which cover major part of economical behavior and bargains);

The tax systems of many countries of the world have evolved gradually over the years. Kazakhstan does not have and do not have time for a lengthy evolution of a tax system, the speedy establishment and development of the national economy. But Kazakhstan will not be able to go to one period of fully satisfactory and contemporary tax system. Progress towards that goal should be implemented in a phased manner in order to allow time, both taxpayers and tax organizations reflect on changes as they are made. Since it is impossible for one to make all desired changes should be a priority.

Taxes, as we all know, are one of the sources of funding of all activities of the State and the economic instrument for the implementation of the Government's priorities. Tax is one of the manifestations of the sovereignty of the State. They differ from the income from State assets and loans. The right to collect taxes has always been one of the sovereign rights of States, as well as minting coins and the administration of Justice, therefore, taxes are set unilaterally, but conflict between the agreement on taxation and coercive nature of their collection of only external. Taxes and their functions reflect the real basis, i.e. the objective regularities of tax relations used in state tax policy.

Provision of tax law are the starting point in the implementation of the tax policy. Thus, tax policy-legal actions of authorities and control that defines a focused application of tax laws. It is also the law of tax technology in management, planning and monitoring of government revenue. Tax policy is a part of financial policy. The content and objectives of fiscal policy due to the socio-economic system of society and social groups, challenges in power. Economically sound tax policy aims to optimize the centralization of funds through the tax system.

In a highly developed market relations, tax policy is used by the State for redistribution of NA to change production patterns, territorial economic development, level of income of the population.

Tax policy objectives: (a) the State financial resources; creation of conditions for the regulation of the economy as a whole; mitigate arising in the process of market income inequality.

There are three types of tax policy:

The first type - setting the maximum tax, characterized by the principle of "take all that you can". In doing so, the State tax trap "predestined" when raising taxes is not accompanied by growth in government revenues. The ultimate border rates specified and depend on many factors in each case. Foreign scientists are called the marginal rate of 50%.

The second type – is the policy of reasonable taxes. It contributes to the development of entrepreneurship, giving it a favorable tax climate. Entrepreneur as is inferred from the tax, but this tends to limit the social programs, since government revenues are declining.

The third type of tax policy to a sufficiently high level of taxation, but significant social protection. Tax revenues are directed to the increase of various social funds. Such a policy would introduce to an upward inflationary spiral.

With a strong economy all specified types of tax policy has successfully blended. Kazakhstan is the first type of tax policy in conjunction with the third.

Tax policy as a set of scientifically based and economically viable tactical and strategic legal action authorities and management can ensure the needs of human beings and growth of social wealth. The original installation of the tax policy serves not only the legal order to be made against the taxpayers of tax payments, but also a comprehensive assessment of the domestic economy, evolving under the influence of taxation. Therefore, tax policy is not automatically execute the requirements of tax laws and their improvement.

Tax policies with a view to the future, is a tax strategy, but at the current moment-tax tactics. Tactics and strategy are essential if a State seeks to harmonize public, corporate and personal economic interests. Often tactical steps taken by States to coordinate taxation at the moment, is not economically justified. This not only prevents the implementation of fiscal policies, but also distorts the economic course of the State.

On this basis, taking into account the forecasts of scientists on the trends of economic development, objective reality, of social status in society, the State's fiscal strategy has the following tasks:

Economic - growth, reducing production cycles, the Elimination of disparities in development, to overcome inflationary processes;

Social - redistribution of NA for certain social groups by encouraging the growth of profits and avoid the falling incomes of the population;

Fiscal - increasing of state revenue;

International – strengthening of economic ties with other countries, to overcome the unfavorable conditions for the balance of payments.

Conflict between tactical actions of management structures and overall strategy tax approved by the constitutional law of the state bring about imbalances budget failures in the economic mechanism of reproduction processes, braking and eventually to the economic crisis.

Validity of tactical action in a tax policy plays a huge role in shaping income budget. Budget assignments for the next financial year should be consistent with the overall strategy of taxation.

The main instrument of fiscal policy of the State is changing tax rates in line with the objectives of the Government.

State recognized make economy stabilizing effect, ensuring the best conditions for economic growth. To carry out the tasks it must have the necessary resources. Some of these can be found at the expense of valuable sources, such as profits of State-owned enterprises. However, in a market economy, the main unit is not public and private enterprise. Therefore, to generate public resources the Government removes a portion of the income of enterprises and citizens. Withdrawn, changing ownership, income is taxed.

Taxes, compulsory payments of natural and legal persons are charged by the State.

All types of taxes levied in the State, forms and methods of construction, tax authorities forms the State tax system. It is designed to create an environment of motivation of economic entities irrespective of their form of ownership, 100 ¬ much amid the business and labor activity; restrict social not justified by the income of individual citizens; to limit the growth of prices and incomes in view of inflationary balance; ensure growth and strengthening the revenue base of the State budget.

Owing to its economic content of the tax system is a complex, interrelated social and economic relations between the various States, the State and taxpayers, between individual taxpayers about the financial management of the State, regions and municipalities, as well as directly to the participating enterprises and citizens. And what are these relationships ¬, the higher the active influence of tax system on the effectiveness of economic policy of the country.

Activity of the tax system in generally appears in implementing of two functions:

1. Fiscal function of the taxes, representing liabilities of taxpayers (including foreign) before the state, allows to form state monetary income, which provide realization of economic policy.
2. Regulative function of the taxes, which represents liabilities of the state before taxpayers, characterizes ability of the system to impact to the economy with stimuli and provide steady positive development.

These functions of tax system come out through the tax policy, through the tax amount and rate, and through the system of privileges and sanctions of tax credits and discounts. In good tax system there is complex realization of its all functions. However in each certain moment in appliance with purposes, goals, structure of economic policy priority can be given to fiscal, i.e. regulative function of tax system. This is the point of harmonious tax policy: its ability to become component and forming part of unified economical area of the country.

Tax systems can represent rather complicated models, because there are lots of taxes, taxpayers, ways of charging taxes and tax privileges.

Taxes are classified by different principles:

• By object of taxation and by relations between taxpayers and the state;
• By using taxes; by type of body charging tax;
• By economical feature of object of taxation;

The modern tax system includes various types of taxes. The bulk of their group is made up of direct and indirect taxes.