The government obtains revenues through taxes and enforcing fiscal policies to balance the economy through the Federal Reserve. Such initiative steps regulate how the households spend their income and encourage the behavior of investing and savings to conform to the initiated fiscal policies. The intervention of would dictate how banks charge their lending rates and interested accrued for the duration of debt payment of the loan as depicted by federal reserve financial standards.
Paying as you earn would eradicate homeowners from exploiting the households who rent and those with mortgages during filing of tax return. Therefore low-income earners experience lower tax rate compared to high-income earners thus initiating a level field in regulating cash flow in society. Although some products such as smoking have a negative health impact, they earn the government revenues through taxation thus becoming difficult to balance between spending and taxation for consumers. however, when the economy is stagnant or grows at a slower rate, the government initiates monetary measures through reducing taxation cost and synergize citizens to spend more of their income and avoid more saving to allow cash flow in the economy.
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Besides, the federal government can regulate the economy through the lending of money at lower rates from banks to entice people to borrow and pay at lower interest rates thus obtaining more revenues. However, evading tax in the U.S becomes difficult since all the bank's services and financial records are electronically updates thus ensuring accountability of bills and revenues within the economy. However, the rate of a person’s spending of money would depend on the income generated in relation to employment as those who spend more have more income hence high taxes initiated on high-income earners compared to low-income earners. Therefore government spending increases GDP when invested in profitable sectors that are taxed to increase revenue collection.
Reference
Easy economics: Taxing and Spending (Chapter 3). Retrieved from:
file:///C:/Users/lenovo/Downloads/Easy_Economics_A_Visual_Guide_to_What_You_Need_to_..._----_(Pg_68--115).pdf
