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Role of Fiscal Policy in Resource Mobilization

Role of Fiscal Policy

In a democratic society, people generally don’t appreciate direct, hands-on control and regulation by the government. Entrepreneurs prefer not to be dictated on what and how much to produce, and consumers resist being directly told what to consume or not. To navigate this, democratic states often rely on indirect methods like fiscal policies, avoiding direct interference.

  • Fiscal incentives, such as tax concessions, rebates, and subsidies, are favored over direct controls. For instance, instead of instructing entrepreneurs, the government might use fiscal tools to encourage certain behaviors, like providing subsidies for desired products or industries.
  • Taxation plays a crucial role in resource mobilization for economic growth. By encouraging savings through well-designed taxation, the government can raise funds for public investment and simultaneously promote private investment. This not only facilitates economic growth but also allows for equitable distribution of resources.
  • In developing countries, fiscal policies take on even greater significance. Public investment becomes essential, particularly in areas where private investments may be scarce, such as infrastructure development, education, and healthcare. Fiscal policies, when properly devised, can efficiently mobilize resources for both public and private investments.
  • Resource mobilization can occur through taxation, public savings, and private savings facilitated by issuing bonds and securities. Progressive income tax, where the wealthier individuals pay a higher percentage, is often considered an effective means of resource mobilization. It not only generates revenue but also addresses income inequalities.
  • However, high marginal rates of progressive income tax may discourage private saving and investment and encourage tax evasion. To address this, proposals like reducing marginal income tax rates while imposing expenditure taxes or allowing exemptions for approved forms of saving and investment have been suggested. These approaches aim to strike a balance between resource mobilization and incentivizing individual savings.
  • Beyond income tax, other direct taxes like capital gains tax, wealth tax, gift tax, and estate duty are also essential for capital formation and reducing income and wealth inequalities. These taxes don’t typically deter incentives to save and invest, making them valuable instruments in a well-rounded fiscal policy.

Read Also: Sources of Resource Mobilization in India

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