Chapter 16, Problem 2AA

To determine

To ascertain the use of federal budget and taxation to explaining the following terms like; fiscal year, budget deficit, national debt, budget surplus, benefit received principle, ability to pay principle, proportionate tax, progressive tax, regressive tax.

Explanation of Solution

Fiscal year; it is a one-year period for financial statements and budgeting, used by businesses and governments. A fiscal year is most widely used to prepare financial statements for accounting purposes.

Budget deficit; A government facing a fiscal deficit for a particular period of time, when its spending is more than it receives from taxation and other sources of government earnings that exclude debt. In principle, an increase in the fiscal deficit will boost a struggling economy by giving people more money, which can buy and spend more.

National debt, if the federal debt goes up, the government can spend more of the spending on interest rates, potentially overstretching public expenditure

Budget surplus, A surplus budget signifies a country's financial affluence. Such a budget may be introduced to minimize aggregate demand during periods of inflation.

Benefit received principle, The benefits earned rule suggests that those who earn the government's greatest profit, either directly or indirectly, have to pay the most taxes, in theory fairness.

Ability to pay principle, it depends capacity to pay that an economic principle which states that the amount of tax payable by the individual should depend on the level of burden that the tax creates relative to the individual's wealth.

Proportionate tax, it permits taxing individuals at the same amount of their taxable income. Followers of a proportional tax structure argue that it offers opportunities for taxpayers to gain more as they are free from a higher tax burden.

Progressive tax, this type of taxation of the income may affect the creation of physical resources. A more egalitarian tax system could decrease the amount of private savings available for domestic investment financing. Additionally, if progressive taxation decreases economic uncertainty, it will boost growth prospects.

Regressive tax, It is a form of tax that is levied irrespective of income, with minimum and maximum income earners paying the same dollar. A regressive tax more strongly impacts people with low incomes than people with high incomes as it is imposed equally in all cases.

Economics Concept Introduction

Introduction: The Budget has an impact on the economy, interest rate and stock market. How money is allocated and saved by the finance minister influences the fiscal deficit. The deficit size and the means of funding it affect the money supply and the economic interest rate.