Table of Contents
This paper presents a detailed description of how fiscal tools boost GDP in a federal system of government. The fiscal tools that the government uses to raise its GDP include business, income and value added taxes. If the economy in a federal government shows signs of entering recession, the government can try to increase the demand by implementing tax cuts or spending increases. If federal government has some target level of GDP, it can use its taxation and spending as instruments to push the economy towards that target. When the federal government intends to increase its GDP, the appropriate fiscal tools it can use to boost its GDP include income, business and value added tax.
The literature review section discusses the major tools that the federal government uses to boost its GDP or to fight decline in GDP. The section will play an important role in the research because it will examine the gaps in literature about the importance of fiscal tools in federal ran governments The objective will be to examine the gaps in literature about the importance of fiscal tools in federal ran governments. One of the major problems that will be examined in this study is that the use of fiscal tools such as taxation is very slow to cause economic change. A tax rate change will take several months to impact GDP growth. Income, business and value added taxes can be used to benefit specific troubled industry.
We will use the United State as a case study to validate our model. Data will be obtained from secondary sources such as US Congressional Budget Office website. The section will entail data collection procedures with the aim of answering research questions of this research paper. The secondary data collection technique is purposed to help structure the findings in a distinctive manner to transform the macro view of descriptive data in the findings into the micro view in order to complete the research dissertation. The process filtered the findings to acquire meaningful insights on the possible ways of measuring GDP in regard to how fiscal tools in federal government boost its growth. This paper will seek to create a bridge between human bias and the research conclusion using statistical analysis of the findings.
The research will contribute to the knowledge of the effects of the implementation of fiscal policies in a federal government. The paper focuses squarely on the theoretical and empirical analyses of various tax measures imposed by governments. By making explicit the financing needs to maintain high GDP, it is important to note that fiscal responses to resource revenue can have a substantial impact on macroeconomic stability of a federal government. The paper provides useful benchmarks and insights on several issues of increasing tax measures from the perspective of optimal policy. The use of data with relatively detailed specification of fiscal variables makes it feasible to stimulate the effects of a given fiscal path or of simple fiscal rules in allocating resource revenues.
Today, federal governments are deeply involved in private economic affairs. Imperfect competition, international conflicts, social goals and a desire to maintain economic stability are some of the reasons why the government has become a full partner in the operations of the United States economy. Economists have tools to measure the state of the economy. The most common measurement is gross domestic product (GDP), which measures the total value of goods and services produced domestically in a year, Otto (2001). Other measurements include: personal income, disposable income and discretionary income (Islam & Hassan 2006).
The GDP does not stay level or change at a constant rate, but rather changes in irregular up and down movements. Otto (2001), indicated that these fluctuations in economic activity are either seasonal, cyclical or long term secular changes. Taxes play an important role in a federal government economy. Without the help of taxes governments will not be able to spend money on social programs and defense. Review on literature shows that public services like police and fire protection can only be provided by government through taxes, since private investors will not supply them. Income taxes reduce a person’s disposable income which is the money left after the taxes are taken out of a person’s paycheck. As disposable income is reduced, people are forced to spend less, which in turn reduces consumption expenditure at the national level and lowers GDP growth.
It has been attributed that if federal government lowers taxes, economic growth and employment will increase. More importantly, if business taxes are decreased, business people will want to invest more in plant and equipment to produce more goods and services, thereby increasing GDP level and growth (Quazi 2007). It is, therefore, clear that fiscal tools have a significant impact on economic goals and business performance. Literature from Journal of Economics and International Finance published by Ogbole, Amadi & Essi (2011), indicated that depending on which economic goal the federal government wants to impact,- fiscal tools can be designed to have the appropriate effect.
When tax rates change, the difference between disposable income and national income also changes. As a result, relationship between the desired consumption spending and the national income also changes. Quazi (2007) noted that for any given level of national income, there will be a different level of disposable income and, thus, a different level of consumption. Consequently, a change in tax rates will also cause a change in the marginal propensity to spend out of the national income.
OECD (2010), in their publication noted that many taxes reduce workers take home pay. The effects of taxation are obvious as in the case of income taxes where workers see the taxes withheld from their paychecks (Islam & Hassan 2006). Business tax does not directly reduce workers’ pay; it generally raises the prices of goods that people buy and lowers the purchasing power of labor income.
The main aim of this study is to determine how fiscal tools boost the gross domestic product (GDP) of a federal system of governance. This major research question will unveil what is meant by fiscal tools, name the major fiscal tools that influence the growth or decline of a countries GDP and explain the three fundamental benefits of the fiscal tools in a federal system of government. OECD (2010), in their publication indicated that a wide range of tax concessions, both targeted and no-targeted are still offered in federal governments particularly on the income and VAT tax. It is important to examine, therefore, whether these provisions amount to a considerable proportion of GDP growth. Researchers should, however, establish whether these reliefs may be justified if they are cost-effective in achieving the GDP growth objective (minimizing distortions, administrative costs and negative distributional impacts), their cost efficiency needs to be assessed as well. WHERE ARE THE GOVERNMENT SPENDINGS???????
Specific Research Aims
Research Question 1: Examine how Income Tax Increases a Country’s GDP Development
- Should a country’s GDP growth be measured against the rate of income tax?
- What are the current swings relative to GDP which influence income tax?
This research question will draw literature from different sources to show provisions of the US income tax code have a significant impact on GDP projections. The literature, in this case, examines why a variety of exclusions, deductions and exemptions in both federal individual and income taxes cause the amount of income subject to taxation to be significantly smaller than the income reported on tax returns. It is important to examine the current swings in revenues relative to GDP which have been concentrated in individual and corporate income taxes.
Research Question 2: Discuss the Contribution of Business Tax a Country’s GDP Development
- What role does business tax play in the growth or decline of GDP?
- Should business tax be increased or decreased to ensure GDP growth and what are the implications to business operations?
This research question is important for the study because a reduction in business tax has negative implication on the GDP. The combination of reducing the rate and eliminating tax expenditures the vast majority of which are assumed to reduce the cost of capital at the margin has roughly offsetting effects on the incentives for new investment. The resulting relatively large statutory rate implies a higher effective tax rate on capital reducing investment, the capital stock, labor productivity, wages and labor supply generating a long reduction in GDP. This question will help the study to detail why GDP must be adjusted for indirect business taxes. While direct business tax is an important feature of a country’s GDP growth, it is important to examine how indirect business taxes contribute towards the GDP growth as well (Islam & Hassan 2006).
Stable and even increasing corporate tax revenues may be also explained by the increase of businesses in the corporation form. Statutory corporate tax rates have been decreasing considerably more than top statutory personal income tax rates, therefore, increasing incentives for businesses to incorporate (Boles 2012).
Research Question 3: Establish how Value Added Tax Boosts a Federal Government’s GDP Growth
- What are the policy implications of increasing VAT compared to GDP growth?
- What are the effects of increasing VAT to the economy?
This question is fundamental because from a theoretical point of view, the increase of VAT as a percentage of GDP should result in a reduction in other tax rates and stabilize the growth of total revenue as a percentage of GDP. The tax base of a gross domestic product VAT is goods and services included in GDP, which includes personal consumption and capital goods (Islam & Hassan 2006). This question will contribute significantly to this study and body of knowledge because over time, US has found relatively simple ways to limit and extend credit exemptions to their VAT for goods traded both within its borders and internationally (Islam & Hassan 2006). For example, the research shows that a 10% raise in GDP yields only a 0.3% percent raise in VAT revenue.
Research Question 4: Examine the Relationship between Fiscal Tools and GDP Growth
- What type of relationships exists between taxation and real GDP?
- Should governments heavily rely on fiscal tools to ensure continued economic growth?
- Who should enforce fiscal policies in the federal government and what is the minimum level of its implementation?
During the past decades a serious debate has raged among the economists over the fiscal and macroeconomic tool effects on GDP. Quazi (2007) noted that budget analysts have long cautioned the federal government that it was on an indefensible fiscal path, as a result of its expected increase in expenditure on Medicare and other prerogative reimbursement as the country’s population ages. It is important to note that duty cuts passed ten years ago also have contributed to the current economic dilemma (Quazi 2007). According to the Wall Street Journal publication by Boles (2012), broadening tax requirements set to end in 2013 and keeping the substitute least tax from affecting additional taxpayers would boost GDP and engender approximately 2 million jobs according to the Congressional Budget Office.
Fiscal tools are means through which the government applies its revenue and expenditure programs to produce the required effect as well as to avoid inappropriate results on the national production, income and employment. This definition appreciates that government taxation and expenditure are the two fiscal tools which bear both desirable and undesirable effects on GDP.
Academics have made contributions to both the theoretical conceptualizations of fiscal tools and the empirical measurements. Baum, Ribeiro & Weber (2012), present one of the most comprehensive models of fiscal strain that captures relationships among political outcomes, the economic base and fiscal tools and policies. The importance of the federal government’s ability to manage short term fiscal shocks and provide fiscal flexibility has been well documented (Baum, Ribeiro & Weber 2012). Fiscal tools provide opportunities for federal governments to raise GDP and share revenue and costs with separate set of funds that are less visible for public scrutiny (Berg, Portillo, and Shu-Chun & Zanna 2012).
The need to measure debt within the fiscal condition framework is an attempt to capture the current GDP growth as it serves as a measure for future fiscal commitments for the federal government. Theoretical arguments which surround fiscal tools have been an investigation subject for policy analysts and economists. Fiscal tools are largely protected on the ground that they can improve economic performance by ensuring growth in GDP. Some scholars such as Baum, Ribeiro & Weber (2012) make an argument that fiscal tools can impact GDP growth when federal governments have uncontrollable expenditures, which affect national fiscal policy.
Several researchers, such as Quazi (2007) and Mckinnon (2012), have put forth arguments to support the opinion that fiscal tools can engender the growth of GDP. The first and most regarded argument is that fiscal tools enhance GDP growth (Mckinnon 2012). This sentiment is highly dependent on the fact that the federal government is more inclined to collect taxes. A lot of studies to examine the relation between fiscal tools and GDP growth started in 1990 including studies by Quazi (2007), Baum, Ribeiro & Weber (2012), OECD (2010), Ogbole, Amadi & Essi (2011) and Mckinnon (2012). However, it is worth noting that the research conducted by the above scholars led to variable conclusions regarding the issue whether fiscal tools promote GDP growth.
A number of literature reviews that recognize a positive relationship between the fiscal tools and the GDP growth appear. Scholars try to focus on the relation between business, VAT tax and GDP growth (Liu 2007; Mitchell & Sparshott 2012), while others focus on the association between the income tax and the GDP growth (OECD 2010; Mckinnon 2012). However, it is important to note that in spite of the conclusions and diversity regarding the issue of fiscal tools and the growth of GDP, the greatest consensus is between the conclusions regarding the issue whether the fiscal tools boost the GDP growth of a federal government.
The review of literature in this study should provide a clear briefing and acknowledgement on how fiscal tools such as taxation should be directed to increase the GDP capacity of a federal government (Baum, Ribeiro & Weber 2012). In this context tax instrument should encourage investment and discourage consumption in order to increase production and hence promote GDP growth. It may be necessary for example, to reduce the high rate of tax on richer people to encourage capital formation (Berg, Portillo, and Shu-Chun & Zanna 2012)
Literature studies conducted by Otto (2001) and Olumuyiwa, Medunoye & Oluwatosin (2012), indicate that when national income declines, income tax and corporation tax automatically brings less revenue. It is important to note that the measure of fiscal tools contribution to GDP growth should be mainly from the dataset Government Finance Statistics Yearbook (GFS) published by the International Monetary Fund (IMF). Although, some researchers are likely to rely on OECD documentation, it is important to note that it does not contain the cross country, time series dataset causing continuing difficulties in carrying out the analysis (Baum, Ribeiro & Weber 2012).
The research strategy is based on a comparative analysis of the secondary sources of data. The country which will be used in this study is the United States. The secondary sources of data include the Organization for Economic Cooperation and Development (OECD), Economic Outlook, the International Monetary Fund (IMF), Congressional Budget Office (CBO) as well as the federal governments national account data. The above agencies were carefully selected due to their popularity as information dissemination agents and the relatively high level of trust associated with their information precision as well as the availability of the sites for public awareness creation and the ease of verification of information.
In the research the questionnaires will be applied. In order to determine the character of the influence of different fiscal tools to the governments GDP, a questionnaire must be developed to gather the needed quantitative data. The questionnaires will be used as an instrument for research in measuring financial analysts and policy maker’s views and perceptions on whether fiscal tools indeed boost GDP. The benefits of using the questionnaires are that they assist the researchers to receive accurate data which helps in arranging an interview, structuring the format of interview and facilitating the process of data analysis. By means of questionnaires, the respondents provide the researcher with necessary information in comparatively short time. Information collected by means of using questionnaire will be transformed in to figures related to the statistics and computed by math processes, and after that produce different tables where numbers have specific meaning.
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Implications of Research
To effectively achieve its objective, the research will identify key issues for present and future decision-making by the federal government to boost its GDP. The major strength of the study is the level of reliability of the secondary sources of data used and the questionnaires in this study. The research is reliable because it depends on the data sourced from trusted websites such as government agencies and state agencies that are recognized globally. Another strength is that the study combined different categories of sources in order to reduce biasness which includes government agencies such as CBO (Congressional Budget Office). The second strength of the research methodology is its flexibility. The study could be modified and it was consistently reevaluated to ensure the highest level of credibility, dependability and transferability of the data.
Having approached this type of research design for the Masters dissertation, it is known that access is a fundamental issue when it comes to securing the required data and getting the right respondents for the questionnaires. Previous experiences in questionnaires and securing online data from the renowned sites such as OECD and IMF as well as getting feedback from participants requires that researchers observe the necessary ethics and high levels of confidentiality. The participants may not be willing to reveal their identity a feature which should not be taken as an offense. This represents a strong reason as to why participation in the research will not be declined by most of the contacted members. However, in order to assure a considerable amount of data in most of the cases, a high number of respondents than needed will be contacted.
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Previous experience has shown that privacy is an essential condition for obtaining the accurate data from participants. Given the position of the respondents and the necessary measures in order to avoid standard answers and get valid responses one will use consent forms through which full confidentiality in relation to position, name and attributes is guaranteed.
The research data will not be used in any other part of educational study. This will ensure that participants will not suffer any harm and they will be unmistakably informed of their right to decline participation in the research. The data will be preserved in a safe condition and anonymity will be assured in all circumstances.
Conclusion and Recommendations
This section of the research will give the concluding remarks on how fiscal tools boost GDP. The recommendations will suggest what governments and policy makers should adopt in order to grow the federal government’s GDP. The conclusion section will explain what the research adds to the current body of knowledge in this area of study.