Taxation and growth Essay Example | Topics and Well Written Essays - 2000 words

Taxation and growth - Essay Example widespread drop in spending or decrease in demand, and the economy faces a lot of inflation that is the general increase in the prices of all goods in the economy. This affects the level of growth in such an economy since most of the income is used on consumption and very little is spent on growth and development. Therefore, the level of growth declines significantly. This can be reversed during economic recovery by use of fiscal policy. This is where the government uses taxation or fiscal policy measures to be able to control the economy (Barro & Gordon, 1984). U.K experienced an economic recession between 1998 and 2012. This was stimulated by the worldwide inflation that was affecting the economy in terms of prices of goods. The government of U.K adopted the use of tax policies to be able to gain economic recovery and growth. Increasing demand is a tool for short-term recovery. This can be done through reduction of consumption taxes. In return, people will spend more hence; there will be an increase in demand, which will stimulate business in the economy. Hence, economic recovery in the short run will be achieved. Increasing the supply in the economy would stimulate long-term economic recovery. This can be done through reducing the taxes for inputs and raw materials that will make them cheaper to stimulate supply. This will therefore lead to increased supply in the economy since suppliers can be able to buy more goods to supply their goods to the market, which leads to economic growth through trade. Low-income earners have very little disposable income. If the government would reduce their taxes, the little income that would be saved would stimulate demand and hence help the economy recover from recession. This is because low-income earners have little to save and to invest meaning that most of their income is used to buy basic commodities. As a result, demand increases and the economy grows significantly. Consumption is a daily activity for every person.