Fiscal Policy

Written by Alexey Dudarev

As a way to earn the revenue, a government may collect taxes to fund the public services (eg army, police, fire department). Policies regarding the collection of taxes are called fiscal. There are two types of taxes - direct and indirect. 

Direct taxes are collected as a portion of one’s income. The most common kind of direct tax is the income tax - which is paid by workers from their wages. Direct taxes can be progressive, meaning that the portion of a tax increase with the increase in income. This is usually done to help reduce inequalities in income and wealth. Taxes can also be regressive, meaning that the amount of a tax decreases as income rises.  Direct tax might also include corporate tax and profit tax, which are paid by firms or shareholders. Usually, direct taxes account for the majority of the revenue collected by the government. 

Indirect taxes are paid through the purchase of a good or service. They are paid automatically as a tax is usually part of a good’s price. Sometimes, indirect taxes are imposed on a certain good to discourage people from buying it, as a tax raises the price of goods. It is done to goods like cigarettes and alcohol and drugs, as they have a negative social impact. The common types of indirect taxes are VAT(Value-Added-Tax), tariffs, service tax, etc. 

As you might have guessed, more taxes might mean that there will be less spending in the economy as taxes raise prices, therefore discouraging economical activity.