Tax is varied across different goods and services so as to reduce the societys welfare dead-weight loss due to overconsumption of demerit goods or goods that imposes negative externalities. GST can be used to implement fiscal policy. As a tax that is imposed economy-wide, GST can be raised or lowered to effectively manage the economy. For example, during economic downturn, GST should be reduced so that the equilibrium output of the society as well as the employment opportunities increase. Conversely, the government should raise tax level during booming period. It curbs the aggregate demand in the long run, hence cools down the economy (i.e. lowers the inflation). It is interesting that, by increasing tax, the general price level will eventually fall. The explanation is that in the short run, tax increase causes mild inflation, however, in the long run, consumers and companies have less money to spend and invest. Aggregate demand as well as price level fall in the long run. GST is not flawless. The blunt tax penalises everyone in the society equally, inclusive of both the rich and the poor. Unlike the income tax or corporate tax, GST is hardly progressive. It makes necessities such as food, transport, houses, clothing and medical treatment more expensive to the exact same extent to both the rich and the poor, adversely affecting the equity of the society. Fortunately, GST can be progressive if the government taxes more on luxuries and less on necessities. Moreover, government can construct strong transfer or welfare system to assist those financially needy citizens.
Posted on: Thu, 22 Jan 2015 22:15:15 +0000
Trending Topics
Recently Viewed Topics
© 2015