FISCAL POLICY

Explain how the government obtains its federal revenue…………………

Introduction

Revenue refers to all the proceeds or income the government obtains from the sale of public assets, collection of taxes, fees charged and from issue of licenses. On the hand, it also refers to the total proceeds received by a company or business entity from sale of goods or services during a certain period of time. The federal government has various sources of revenue which include; payroll taxes, corporate taxes, individual income tax, excise taxes and others. The first three forms the major composition of the federal revenue.

Payroll taxes

It refers to either tax that employers are required to deduct from employees salaries and wages or what the employers pay from their own income. This is usually related to the cost of hiring employees and is directly related to the amount an employee earns. This type of tax forms part of the most collected revenue. In many developing countries many people tend to avoid this kind of taxes by not submitting their tax returns. This usually is a challenge to the federal government and those committing the offence maybe imprisoned if caught. Usually it is shown on the pay slip as pay as you earn or pay as you give.

Individual return levy

In US it denotes to tax charged on individual returns or local authority. This levy is calculated through application of a rate commensurate to the amount of income one earns. The amount of tax increases as the income increases to taxable income. This is the largest component of the federal revenue in the US.  Some of the items taxed are capital gains, gross income, allowances, and retirement savings. Any losses reduce the amount of taxable income.

Corporate taxes

These are taxes levied from the corporate business operations. The taxable income of corporations varies according to the type of entity and the amount of tax returns filed by the corporate entities. Corporate tax income can be paid in advance instalments depending on the management strategic management.

Expenditures

Expenditure is the cost incurred in acquiring goods, services or generally the cost incurred in operating a business or daily activities. We have different kinds of federal overheads which include; capital expenses, daily (current) expenditure and non-current expenses.

Capital expenditure refers to the amount or cost incurred in acquiring non-current assets such as plants, buildings, vehicles and machinery. This kind of expenditure may also be in a form of investment because the assets acquired are used to generate more revenue.  Capital expenditure. Examples of capital expenditure include the cost of goodwill, lease cost, cost of freehold land and the legal charges in connection with the land, cost of machinery, fixtures and fittings, cost of automobiles and any other cost of equipment that will last for more than a year among others. The cost incurred is offset by the revenues collected by the federal system.

Daily expenses denotes to the cost incurred on daily basis on items for  the government, firm or household. These expenses a rise daily according to needs of the entities involved.

Revenue expenditure is the expenditures incurred in the daily running and administration of business and effect is normally exhausted within a period of one year. It includes the expenditure incurred for procuring raw materials needed for production of goods which then resold and the cost of repairing machinery and buildings. Examples include; wages paid, cost of power, rent and rates, commissions, insurance, etc.

 Current Federal Debt

According to the budget of the US government fiscal year 2012 the current federal debt is estimated to be 15 476 243 million of dollars as by 2011. This is expected to escalate by a trillion every year if drastic measures are not taken to avert the situation. US house speaker John Boehner (Babington 2011) postponed a vote on a debt ceiling measure that was already running into opposition to give him more time to hunt for votes. Budget officials said the debt ceiling would cut spending by less than $1 trillion over the coming decade instead of the promised $1.2 trillion.

The past trend of federal debt

For the last  two decades the federal debt had reached at 49.3% of GDP in 1993 and dropped down to 32.5% by 2001 and  then rose to 36.9% by 2005(US government 2011) . This decline in deficit in 2006 and 2007 enabled the reduction of federal debt to 36.2% of GDP in 2007. The amount of deficit has been observed to escalate more with republican governments only to reduce with the democrats. This gives the impression that the democrats have a better management of financial crisis than their counter parts republican.

The estimated future federal debt

The US is on the brink of a possible default with the growing US debt if the economy remains unchecked. The repercussions may be severe as it may lead to loss of jobs of the most Americans. The stock market may decline due to unchecked debt level as it is estimated that there will be a continued increase by $1 trillion dollar in debt over the next decade. Stringent measures should be undertaken to avert this financial crisis as it would see a rise in interest expense which would make borrowing expensive and the dollar value weaker.

 

Recommendation to the President on how to avert the situation

As the chief economic Advisor to the President I would advise him to concentrate on the following broad set of key factors that has immensely contributed to the imbalances; (Pakravan 2011).

Easy monetary policies-in the Bush regime the Greenspan-guide federal reserve ignored the increasing debt surge, fear about inflation that led to the US central government slimming down in June 2004. The President should not ignore these concerns as they may ditch deeper into inflation.

Unregulated financial innovation- Since it has allowed mispricing of the securities and attrition of the Banks Capital cushion this innovations should scrutinized to avoid dilution of the credit standards and unprecedented level of systemic risks.

The failure of regulatory bodies in US financial markets-: The president should employ good regulators who can be able to prevent excessive leverage of investment banks and the risks regulation shown by the production of off-balance sheet structures to avoid the banks malpractices.

The downfall of economic discipline in Bush Presidency: The president has a lot to learn from Former President Bush’ regime. By avoiding immense tax cuts and not forgetting the impact of the two wars. These two factors have continued to immensely deepen the financial crisis and recession and yet they could be avoided.

 

 

References

US government (2011) Budget of the US Government Fiscal Year 2012, US Government

Printing office

Babington (2011), John Boehner delays Vote on Debt Plan, Associated Press media, News

accessed 27-07-2011

Karim Pakravan (2011), Global Financial architecture, global imbalances and the future of 

the dollar in a post-crisis world, Journal of Financial regulation and Compliance, Vol.19 No. 1, Emerald Group Publishing Limited

 

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