Thursday, March 12, 2009

taxation and spending

whenever we pay our taxes ,such as VAT on goods we buy ,the money leaves our wallets ,purses or bank accounts and eventually reaches the bank accounts of the government at the bank of england .these taxes , when received by the government ,are excluded from the money supply.so,when people pay taxes ,the money supply falls.
but the government does not sit on this money paid in taxes -it spends it .when pensioners ,teachers,soldiers,students ,etc receive this money ,their cash or bank deposits rise ,and those of the government fall . it is the reverse of tax collecting ,so the money supply rises .
Now comes abig 'if',If the mount raised in taxation and the mount spent by the government are exactly equal,then the combined effect of taxation and spending is nil, because the increase in one cancels out the increase in the other .Money supply is unchanged.
If you say 'Nonsense ' they are never equal,because the government is always spending more than it raises in taxes ,then,surprisingly,you are only half right .let us see.

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