If Expansionary Taxation Policies Are Left Unchecked

What Will Happen if Expansionary Taxation Policies Are Left Unchecked?

Expansionary policies are the taxation policies the Government uses to boost their spending capabilities. These policies are also crucial for reducing the tax burden on the common public and stimulating economic growth. Expansionary taxation policies have historically delivered decent results for governments, albeit they are used for short-term solutions. If the Government doesn't keep track of these policies, it can stem into bigger problems that can leave disastrous consequences on the economy.

In the short term, this type of taxation policy act as a boon for increased business investments. It also increases consumer spending. So, this momentarily creates a spike in people’s income. With more disposable income, people are encouraged to splurge on goods and services. So, it leads to increased higher demand and more economic growth. Simultaneously, with increased demand, businesses are also motivated to invest in new projects and business expansions. So, in the short term, this is a great driver for economic growth.

However, if left unchecked, they can be the root cause of multiple negative economic consequences. The first issue that can arise because of unchecked expansionary policies is inflation. When the Government curbs taxes and increases the spending capability of the population, it keeps injecting more funds into the economy. As the money supply gets too high, the prices of all the commodities increase. With more money in the system, businesses and consumers start competing for goods and services. As the inflation rate spikes, it erodes the value of savings, and people find it extremely difficult to afford even the basic necessities. For example, Zimbabwe witnessed such a problem where the inflation problem became so severe that it went beyond 2,50,000,000% within months. The whole country was full of millionaires, yet they struggled to buy their daily groceries as the prices became absurdly high because of hyperinflation.

Another issue with expansionary taxation policies is that they decrease the revenue of the Government over a period of time. As the Government reduce their taxes, it starts earning lesser revenues. Eventually, they find their funds depleted when they try to invest in developing new infrastructure or public services. As their revenues keep falling, the Government fails to deliver good quality services or develop a solid infrastructure that proves harmful to the economy in the long run. Moreover, when the Government fails to generate enough revenue to sponsor their operations, they are forced to lend money from the banks. So, they are forced to borrow these funds at a higher interest and find themselves in more economic problems.

Expansionary taxation policies are also the main reason for trade deficits. As the Government decreases the tax rates, it incentivizes businesses and people to spend more on buying imported goods and services. So, the country starts to import more than its export rates, eventually leading to trade deficits. Trade deficits are lethal for a country's economy as they deplete employment opportunities and severely damage small and medium-scale domestic industries.

Finally, these policies also create an endless loop of boom and bust. The Government injects more funds into the system, creating an illusion of economic growth. However, in the long run, if the policies are kept unchecked, the whole system becomes unsustainable. The boom period won't continue for long, and it may witness a sudden collapse any day. This lays the foundation for economic hardship and widespread unemployment.

To ensure that the economy doesn't get impacted by such negative consequences, every Government should be careful while managing their expansionary taxation policies. The Government should have competent officials who can monitor and manage inflation by adjusting the policies whenever needed. They should be alert to prevent prices from getting out of control. At the same time, the Government should know how to ensure enough revenue consistently to fund any infrastructural development and public services. By ensuring these steps, a government can ensure they are falling into the grasp of trade deficits or facing any unsustainable boom.

Conclusion:

Overall, expansionary policies can be the ideal resolution to battle a slump in the economy, but only in the short term. This kind of policy should be carefully managed to get past any negative consequences in the long run. With unchecked expansionary taxation policies, any economy will nosedive into decreased revenue, inflation, economic instability, and trade deficits. So, the Government should work to balance between ensuring economic stability in the long run and stimulating economic growth.

Frequently Asked Questions:

1. What factors get affected by expansionary taxation policies?

Ans: The factors that get affected by taxation policies are –

• Increased inflation
• Stimulated economic growth
• Currency devaluation
• Decreased unemployment

2. Do expansionary taxation policies make governments buy or sell bonds?

Ans: When a government implements inflationary policies, they are forced to buy more bonds. So, it decreases the need for a reserve, which drops the interest rates of the federal funds.

3. What factors would be affected by expansionary fiscal policies?

Ans: The expansionary fiscal policies can result in –

• Growing trade deficits
• Rising interest rates
• Accelerating inflation

The chances of these happening are even greater if implemented during healthy economic expansions.

4. Do expansionary taxation policies affect supply and demand?

Ans: Expansionary taxation policies force the Government to buy treasury notes from the central bank. This causes a fall in the interest rates on loans to banks. This, in turn, reduces the reserve requirements. Collectively, all these actions increase the supply of money and lower interest rates. So, the economy sees a major increase in supply and demand in the short term.

5. What is the lasting effect of expansionary taxation policy?

Ans: An expansionary taxation policy leads to a stark increase in consumer spending, thus increasing economic growth. The end goal of expansionary policies is to warm up the economy. The intended effect of this kind of policy is to generate more money for the people and encourage them to spend more. However, if left unchecked, it can lead to severe economic collapse.