if the government faces a fiscal deficit of $ 100 million because it collects $100 million with 6% of the sales tax. as a policymaker can the government increase the tax revenue by doubling the sales tax to 12%. if yes then why and if you it cannot then why not?
The fiscal deficit is the situation in which the government spending becomes higher than the government revenues. The main forms of government revenues include the taxes collected from the public as well as business and the non-debt capital receipts. There are many different forms of spending by the government which include transfer payments, public expenditure for infrastructure, employment, economic development, etc. When the total spending becomes higher than the revenue, it leads to a fiscal deficit in the economy.
In this case, the government is experiencing a fiscal deficit of $100 million when it collects taxes at 6 percent. Tax is a unilateral payment that is made from the public towards the government on various grounds such as based on the income earned, based on the profession, wealth, etc. Since taxes cost to the consumers as it reduces the disposable income, increasing taxes to increase the revenue of the government will not succeed. This is because of the fact that when people are forced to pay double tax percent to the government, people will be discouraged to work hard and earn more. They will choose not to work in order to reduce their tax burden. Many will find other ways to evade the tax burden such as wealthy professionals and businesses. Thus, the impact of charging 12 percent sales tax actually leads to a reduction in the total sales and sales tax revenue to the government. Thus, it is not advisable.
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