Debt and Taxes Essay Example | Topics and Well Written Essays - 1250 words

Debt and Taxes - Essay Example The study recommends that there be further research on the best ways of finding a balance between the two. Debt and Tax Introduction With increased concerns on the fluctuation of the world’s economy, governments have been on focus on the way they have handled these shifts. Borrowing and taxation have been largely used by various governments through fiscal policy to offset the imbalances that have been created by constant economic downfalls. Most governments have historically relied on domestic taxes for the facilitation of various expenditures. However, with pressure that arises from budget deficits, it is usually common to hear of governments borrowing to make up for the deficits in their expenditure plans. In addition, for an individual borrower, it is usually a general principle that the amount loaned out is considered to be part of income and therefore subjected to taxation. Consequently, it has been generally concluded by many researchers that taxation is the best way to ensure that firms utilize debt in their capital structure. Such is the complex relationship between debt and tax that there are various dynamics towards the two concepts as illustrated in economics. In view of the mentioned relationship between tax and debt, this paper will explore the various issues that come up as a result of the close examination of the two concepts. The economic implications, justifications of fiscal measures with relation to the two and other arguments on the relationship between the two concepts will be discussed. This will be done through use of available literature on the two issues. As a result, the paper will finally make conclusions with regards to the relationship and implications of taxation and debt policies by governments. In addition, the paper will identify and recommend the areas on the two concepts that will need further research. To begin, it is important to understand the significance and meaning of the two terms with respect to the underlying d iscussions. Taxes are the main fiscal policy instruments largely employed by federal governments to ensure that there are balances on earnings in particular areas of the economy as well as have a resource pool for the financing of public expenditure for the benefit of the citizens. Taxation is therefore a tool used by treasury to ensure that citizens and firms operating in the economy contribute to a larger pool where the government can draw funds for its smooth functioning as well as provide basic amenities and services like healthcare, education and security to all citizens (Simpson 4). There are various categories of taxes with respect to various economies. The United States’ economy, for instance, has three basic categories of taxation. Simpson (6) enlists them as progressive tax, regressive tax and proportional tax. On the other hand, debt is as a result of borrowing by the government, firms or an individual. Usually, the most debts attract interests which are paid on to p of the money borrowed for a specified period of time. As a result, taxation is connected with debt because the interest payable is classified as income and is therefore subjected to taxation. Taxation is used by government for fiscal policy measures that may be aimed at regulating the economy. For instance, in cases where there is a slow economic growth, governments may reduce taxation to some sectors to encourage borrowing and expenditure which therefore translates to growth.