Exercise: How Should the Government Spend Your Taxes?
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Summary:
Taxes are the main source of revenue for governments. The government budget balance is the difference between government tax revenue and government spending. Either a change in tax revenues or a change in spending lead to a change in the government budget balance.
Some governments are free to run budget deficits or
surpluses as needed when tax revenues are more or less than their expenditures. Other governments are constrained by
parliamentary oversight from borrowing or saving, so they must adjust their
spending to maintain a targeted budget balance.
And sometimes, revenue from taxes designed to influence individual behavior,
such as cigarette taxes, are rebated back to taxpayers in some way. The rebate
leaves consumers with the same income as before, so the tax does not add to
government revenue. These different ways for the government to handle its tax
and spending decisions mean that the same tax can have different effects on an
economy, depending on what the government does with its tax revenue. The choice of government closure in UNI-CGE model describes all three of these options.
In this model exercise, we examine how a tax rate can have different impacts on the economy depending on how the government spends and saves tax revenue, as described by the choice of government closure. This exercise uses the USA333 database in the UNI-CGE model.