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Fiscal Stress: Can Government control?
Dr. Abha Wadhwa
Jan 2010
Jan 2010
Fiscal Stress is a symptom that shows that something is wrong in the system today, and that something should be done to relieve or remove the cause of stress. The problem is that there are more claims upon the public purse for services than there is money to meet these claims.
Stress affects the everyday workings of the government and creates a friction in the relations between state government responsible for delivering many public services and central government responsible for many decisions about public spending. Ordinary citizens are aware of fiscal stress, simultaneously facing annually by escalating bills for local taxes.
Citizens assign responsibility of financing to the governance for providing them with associated incentives.
Government can solve this problem by making payments, by taxation. The normative question is about the desirable 'structure of taxation' and 'optimal taxation' which involves trade-offs between efficiency and social justice.
Normative Questions
How should the condition of efficient public spending be amended when spending on public goods is financed by compulsory taxation rather than by voluntary personal contribution?
How should government response when tax evasion takes place?
When taxes are used to finance public goods, an efficiency loss known as excess burden of taxation is present. The excess burden arises for both direct and indirect tax.
A direct tax is paid when income is earned.
An Indirect tax is paid when income is spent.
The excess burden of Income–tax is revealed by asking the person being taxed one of the following two questions:
1. How much are you prepared to pay to avoid the government levying the tax on you?
2. If the tax is levied, how much does the government have to give you to compensate you for tax?
The answers to the questions depends if the enterprises are deriving benefit from the taxes paid to the government. If there is a benefit, then taxes paid are not personal loss but are the consequence of delegation to the government of the responsibility to finance.
The burden of taxation is felt as a personal loss borne by the tax-payer which is not directly observed as any sum of money. It is incurred when tax-payers spend time in collecting and reporting the information required for tax reporting obligation and when accountants, tax-advisors and lawyers spend time working on tax related matters for clients. Tax-payers, of-course is entitled to seek professional advice to reduce legal tax obligation. There is also an emotional cost of taxation in the course of tax-audits. Strangers with the backing of the law delve into the details of private lines. Some people fear confronting authorities and suffer anxiety while waiting to hear whether there tax return has been accepted, even when to the best of their knowledge they have truly reported their income.
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