Taxes are a form of tax policy used by governments to manipulate the economy towards a desired result, such as increasing or decreasing aggregate demand, incentivizing workers, and influencing business decisions. Tax policy is used to control demand for goods and services, influence business behavior, and encourage investment in desirable sectors.
The relationship between tax policy and taxes is the fact that taxes are a form of tax policy used by the government to control or manipulate the economy to a desired result. The precise application of this type of fiscal policy depends on the exact goal the government is trying to achieve. Some of the results of manipulating taxes as a form of fiscal policy include increasing or decreasing the level of aggregate demand, providing an incentive for workers, and a way to influence favorable economic decisions by companies.
A link between fiscal policy and taxes can be seen in how fiscal policy is used to control the total rate of demand for final goods and services in an economy. For example, where the government observes that the level of consumption in the economy has become too high, it may raise the level of taxes in an attempt to address this trend. Such an increase will not only raise the level of taxes that people and companies pay, but it will also reduce excess liquidity in the economy by absorbing some of the excess money in circulation. When this happens, the resulting shortage of money will lead to a corresponding reduction in the rate of aggregate demand.
Another link between tax policy and taxes is how taxes are used to influence businesses to behave the way they want. For example, if the government’s purpose is to encourage companies to hire more people, it can reduce the tax rate in relation to the number of their employees. It can also grant them certain tax breaks or tax incentives for hiring a certain number of employees. The benefit from such companies could increase as a certain milestone is reached in relation to people’s employment.
Fiscal policy and taxes are further linked in this way by the government’s use of tax incentives to encourage companies to invest in certain desirable areas or sectors. For example, if the government is trying to encourage more companies to invest in developing green products, it could offer tax incentives, rebates or rebates to companies that invest in those products. Another way that fiscal policies and taxes are related is through the use of taxes to encourage greater productivity in the economy through lower taxes on personal income.
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