If increase in expenditure in the country..Then how it impact on tax
Answers
Answer:
Taxes lower households' disposable income. The amount collected in taxes doesn't find its way into consumption (“C”). But if the government spends every dollar that it collects in taxes, then that amount does find its way into total demand through government expenditures. When that occurs, the GDP remains unaffected by taxes. The size of the economy is the same whether people choose to produce and consume private goods (angora sweaters) or public goods (army uniforms). The mix of goods doesn't affect the level of GDP, as long as the total amount spent on them doesn't change.
What happens when the government collects more in taxes than it spends?
Total spending—and therefore the equilibrium level of GDP—decreases. Suppose that the money for army uniforms is collected but not spent. In that case, there's no need to manufacture the uniforms, no need to staff the uniform factory, and no need to pay the workers, who now have less income to devote to consumption.
In general, when the government brings in more in taxes than it spends, it reduces disposable income and slows the growth of the economy. So, the fiscal policy prescription to stabilize an overheated economy is higher taxes.
In times of inflation—when too much demand is bidding up prices—a tax increase, coupled with no increase in government spending, will dampen the upward pressure on prices. The tax increase lowers demand by lowering disposable income. As long as that reduction in consumer demand is not offset by an increase in government demand, total demand decreases.
A decrease in taxes has the opposite effect on income, demand, and GDP. It will boost all three, which is why people cry out for a tax cut when the economy is sluggish. When the government decreases taxes, disposable income increases. That translates to higher demand (spending) and increased production (GDP). So, the fiscal policy prescription for a sluggish economy and high unemployment is lower taxes.
Spending policy is the mirror image of tax policy. If the government were to keep taxes the same, but decrease its spending, it would have the same effect as a tax increase, but through a slightly different channel. Instead of decreasing disposable income and decreasing consumption (“C”), a decrease in government spending decreases the “G” in C + I + G directly. The lower demand flows through to the larger economy, slows growth in income and employment, and dampens inflationary pressure.
Likewise, an increase in government spending will increase “G” and boost demand and production and reduce unemployment.