What is the relationship between fiscal policy and taxes?
The relationship between fiscal policy and taxes is the fact that taxes are a form of fiscal policy used by the government to control or manipulate the economy for the desired result. The exact application of this type of fiscal policy depends on the exact goal of the government trying to achieve. Some of the results of manipulation of taxes as a form of fiscal policy include an increase or decrease in the level of aggregated demand, motivation for workers and a way to influence the favorable business decisions of companies.
Connection between fiscal policy and taxes can be observed in a way that fiscal policy is used to control the overall demand for final goods and services in the economy. For example, if the government notes that the level of consumption in the economy has become too high, it can increase the level of taxes in an effort to solve this trend. Such an increase not only increases the level of taxes that people and companies pay, but also reduce excessive liquidity in the economy by cleaning some of the excess money incirculation. If this happens, the resulting apparent lack of money will lead to a corresponding reduction in the level of aggregated demand.
Another link between fiscal policy and taxes is the way taxes are used to influence businesses to behave in the desired way. For example, if the government's aim is to encourage society to employ more people, it can reduce their taxes in relation to the number of their employees. It can even provide them with certain tax reliefs or tax incentives for employing a certain number of employees. The advantage that I am increasing to these companies could increase with a certain milestone in relation to the employment of people.
Fiscal policy and taxes are further linked in this way the government's use incentive to encourage companies to invest in certain desired areas or industries. For example, if the government is trying to encourage more companies, ABY has invested in the development of green products, it can apply tax incentives, discounts or reduce companies that invest in these products. Another way to apply fiscal policies and taxes is to use taxes to support greater productivity in the economy by reducing personal income taxes.