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The Case:

The two main tools of fiscal policy are taxes and government spending. Tax generation is a major source of revenue for government. Tax money is used for welfare of the society particularly for weaker sections of the society. This revenue is mainly used for the operation of infrastructure, health sector, education sector, law and order and defense system. Contrary to it, a lower tax rate imposition is also beneficial for the people. Keeping in view this fact, Government has announced a tax rate reduction policy from July 01, 2018.

 

Requirement:

Keeping in view the above facts and figures, would this tax reduction strategy affect the consumption of the people of the Pakistan. Explain logically.

 

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Solution

 Taxes reduce both demand and supply, and drive market equilibrium to a price that is higher than without the tax and a quantity that is lower than without the tax. Actual and Statutory Incidence of Tax. Tax authorities usually require either the buyer or the seller to be legally responsible for payment of the tax.

Advocates of tax cuts argue that reducing taxes improves the economy by boosting spending; those who oppose them say that tax cuts only help the rich because it can lead to a reduction in government services upon which lower income people rely.

We find that, while there is no doubt that tax policy can influence economic choices, it is by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger economy in the long run. While rate cuts would raise the after-tax return to working, saving, and investing, they would also raise the after-tax income people receive from their current level of activities, which lessens their need to work, save, and invest. The first effect normally raises economic activity (through so-called substitution effects), while the second effect normally reduces it (through so-called income effects).

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Taxes reduce both demand and supply, and drive market equilibrium to a price that is higher than without the tax and a quantity that is lower than without the tax. Actual and Statutory Incidence of Tax. Tax authorities usually require either the buyer or the seller to be legally responsible for payment of the tax. Advocates of tax cuts argue that reducing taxes improves the economy by boosting spending; those who oppose them say that tax cuts only help the rich because it can lead to a reduction in government services upon which lower income people rely. We find that, while there is no doubt that tax policy can influence economic choices, it is by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger economy in the long run. While rate cuts would raise the after-tax return to working, saving, and investing, they would also raise the after-tax income people receive from their current level of activities, which lessens their need to work, save, and invest. The first effect normally raises economic activity (through so-called substitution effects), while the second effect normally reduces it (through so-called income effects).

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