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Government Spending and Taxes

Compulsive use of a substance known by the user to be harmful

Government Spending and Taxes

Taxes: It’s how the government funds essentials like roads and schools. However, what happens when the government spends too much, and people pay too much taxes? How bad would that be for the economy?

The United States must have roads and schools, but what happens when tax money doesn’t improve them? What happens when government spending becomes a problem? This article will answer these questions and more.

Fiscal Policies

It’s no secret that essentials like food and rent have increased in prices recently. More people worry about their financial futures, and unemployment is still an issue. That’s where the government comes in with fiscal policies. Two policies the government uses are government spending and taxes.

Government Spending

The government uses government spending to strengthen the demand for goods when the demand is weak. That can include buying a fleet of cars for government employees. Government spending can either raise or lower real GDP and affect businesses selling goods and services the government buys.

However, when the government spends or prints too much money, it slows down economic growth and causes inflation. In 1987, the United States budget was around one trillion dollars. By 2002, the budget had doubled to two trillion. The current federal debt is around $21 trillion. How did the United States get here?

Taxes

The government does not own any of its own money, so where does it get it from? That money comes from the government taxing its citizens. Tax changes affect a person’s income, and their income affects their taxes.

When consumption changes (either by increasing or decreasing), the real GDP affects taxes. The government can adjust taxes and influence economic output. There are several ways to change taxes. For example, marginal taxes can rise or drop. They can also be eliminated. Tax rules can also change.

Taxes give citizens essentials like roads and schools seem to be free. However, these essentials come at the cost of paying taxes. People like getting free stuff; they don’t like paying more in the long run. It’s why many people complain about paying taxes.

Tax reforms, however, give people the hope of increased salaries. Those reforms, though, come at the government’s expense of borrowing the same money and increasing interest rates. If the government doesn’t issue taxes, how else will it get the money for government spending?

Other Ways to Spend Money

Besides taxes, the government likes to spend money it doesn’t have– borrowing money from bond markets and printing more. However, both of these methods have their issues.

There’s only a finite amount of money in debt markets. If the government borrows more money, there’s less for the private sector. Excessive government borrowing also increases interest rates, making it impossible for private sectors to raise money.

The government printing money may sound ideal, but excess printing can lower its value and cause inflation. Inflation makes essentials like food and rent more expensive.

Most governments use a combination of these two methods along with taxes to pay for government spending.

What’s the Solution?

Taxes can be cut, but interest rates increase. Debt can be reduced, but taxes are raised. What’s the solution?

A government’s economy can grow by spending less than what the GDP gets in taxes. If the GDP is restricted, then taxes can be restricted, too. Thus, citizens can choose how to spend their money.

Sources:

https://study.com/academy/lesson/fiscal-policy-tools-government-spending-and-taxes.html

https://www.managementstudyguide.com/government-spending-vs-government-taxation.htm

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