Business, Legal & Accounting Glossary
Fiscal neutrality is the impact of fiscal measures on an economy. Desirable fiscal neutrality implies normal functioning of economic forces even after the introduction of new taxes or tax structures. The introduction of new taxes ideally should not destabilize normal economic activity.
Any fiscal measure creates distortions in an economy, even negligibly. For instance, sales tax has a negative effect on the consumption of any good or service. Income tax will tend income earners to move away from an income bracket that is being taxed. Manipulation of income is a common practice to avoid paying income tax. Other effects of fiscal regulation are the movement of income earners from the workforce, and the proliferation of the black economy.
A major impact of fiscal neutrality is the formation of a permanent under-privileged class discouraged by existing tax structure to take up better employment opportunities. They rely on welfare remedies provided by the government. To achieve fiscal neutrality, many governments impose a marginal tax which is based on an additional income above a fixed threshold. A larger margin leads to a greater tax rate. So, in effect, after paying for taxes, disposable income remains similar, even after a rise in earnings.
Some fiscal distortions are deliberate in nature to prevent consumption of certain goods or services like tobacco and alcohol. Prohibition is an alternative way of preventing the consumption of such articles, but it leads to crime. The carbon tax is another example of a fiscal measure aimed at preventing the emission of industrial waste.
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This glossary post was last updated: 27th March, 2020 | 28 Views.