A) Read this article about Functions of taxation in which some headlines are missing. Discuss with a partner what headlines you would expect to find in each gap

 

Taxation and fiscal policy.

(1)__________________________

The main financial weapons of a national government are its expenditures on goods and services, transfers (including negative taxes), taxation, public debt management, and monetary policy. Some or all of these may be manipulated to alter the level of total expenditures by all groups in the economy and at the same time may be used to alter the pattern of these expenditures.

 

(2)__________________________

The deliberate manipulation of taxes for the purpose of achieving full employment is subject to both political and economic constraints. The reduction of effective rates of tax, for example, may be irreversible because of political objections to tax rate increases. In addition, taxes have other functions besides revenue, such as resource reallocation and income redistribution, and these functions may be partly defeated by changing the tax structure for purposes of influencing private expenditures. These considerations do not imply that the manipulating of effective rates of tax poses insurmountable difficulties; only that the difficulties must be recognized and, if possible, weighed when making a final decision.

 

(3)___________________________

Taxes are interdependent among themselves and also interdependent with other fiscal weapons. A reduction in taxes on company profits leads to increased revenue from a personal income tax because some portion of the increase in after-tax profits will appear as an increase in dividends. Different taxes compete for the income of owners of resources; an increase in the effective rates of one tax reduces the yield of others. In selecting taxes to manipulate in influencing private expenditures, these repercussions on other tax yields must be taken into account if the desired total change in revenues is to be achieved.

 

(4)___________________________

 

Taxes are also interdependent with other fiscal devices. In Western countries, and many others as well, national monetary systems are banking systems characterized by bank creation and destruction of money, fractional reserve requirements, and central bank determination of changes in bank reserves. Treasuries must conduct their finances within this institutional framework.

 

(5)____________________________

Effective fiscal policy presupposes cooperative central bank policies; otherwise, fiscal measures designed to stimulate the economy may be offset by monetary measures. Central banks are the institutions that have the power to create money in any amount. If, then, a government decides, for example, to reduce effective rates of tax as a stimulating measure during a depression, its treasury will initially find itself depleting its cash position or, in the case of European national treasuries, will be increasingly in debt to the central bank. If the treasury department sells public debt or if the central bank does so instead, the cash released to taxpayers is reabsorbed by net sales of public debt. Depending on the circumstances, these combined actions may be perfectly offsetting, or in order to balance they may on balance be stimulating or depressing with respect to private expenditures on goods and services.

 

B) Match these headlines (A-E) with the gaps in the article (1-5).

A  The influence of political and economic tensity on taxes.

B  The main financial weapons of a national government.

C  The consequence of fiscal policy.

D  Taxes as fiscal weapons.

E  Tax interdependency.

 

Exercise 6.

Fill in the following prepositions where necessary.

to (x2)    at of     for      in         with       without

People often respond (1) ___ increased taxation by working harder, to reduce the fall in their after-tax incomes. Their increased work effort clearly represents a cost to these people, and this cost should be added to the observed reduction in real after-tax income to arrive (2) __ the total cost of the tax increase. This total cost would be reflected in a utility measure that took account (3) ___ the disutility of work.

 In considering the extent of inequality, real after-tax income can be misleading. If everybody received the same hourly wage, but some worked more hours than others, there would be inequality in terms of income but the equity argument (4) ___ taxing high earners more than lower earners would be weak. After all, anybody could choose to work the longer hours. However, if the same degree of earning inequality was due to differences (5) ____ wage rates, the equity argument for redistributive taxation would be considerably stronger. If utility was used instead of income as a basis for inequality measurement, the differences in work effort would be taken into account: the case of equal wage rates would show a smaller degree of utility inequality than the case (6) ___ differing wage rates.

 When taxes are applied (7) ____ consumption goods, relative prices will change and consumers will respond by changing their consumption patterns. This should result in a change in the weights used in the price index that converts nominal to real income. It is not possible to ensure that the weights change properly (8) ____ knowledge of consumer preferences as represented by utility function. It is then more convenient to use the utility function directly.

 

Exercise 7. Word formation.