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Definition and Role of the Revenue Policy in Economy Term Paper

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Updated: Dec 5th, 2019

A sound revenue policy is considered an essential component of any strong fiscal management practice. Notably, the revenue policy outlines proper controls for use in budgeting and forecasting. Additionally, the revenue policy outlines how budgetary reconciliations are to be attained.

To ensure this is done effectively the government ensures that there is good and proper budgeting strategy. With mismanagement of public resources dogging many governments, the revenue policy acts as a tool, which helps regimes to guard against the misuse of public funds.

Although other factors of revenue policy are not any less important, budgets have significant relevance since they determine how revenues are spent. As economists and non0-economists readily know, money is a scarce resource. As such, only a limited amount of money is available to any government at any given time.

As such, planning and prioritizing spending are terms that are always featured when formulating budgets. As (Steuerle 19) observes revenue policy in prioritizing spending in any country or organization. Additionally, such a policy helps in revenue collection thus ensuring that there are enough funds to be used in the budget.

The revenue policy is also helpful in the determination and creation of an investment friendly environment.

The Budget

Public budget is a very important document because it shows how the government spends the revenue it has obtained from the public. Specifically, the budget allocates the amount of money a government wishes to spend on specific tasks, in order to avoid unjustified spending and mismanagement of funds.

As such, a budget is a decision making tool, used to distribute government revenue among the various sectors. It ensures that there are limits set for the different activities that a government undertakes, and makes certain that no surplus is directed to a given project.

Most of the tasks performed in budgeting are technical in nature, and are meant to ensure that at least the estimates done are correct. Despite this, it is vital to note that, public budgets are not entirely technical managerial tools, and that they too are culpable to the political environment that affects other sectors of the economy (Rubin 29).

It is also vital to note that, budgets are an estimation of what governments intend to do in a financial year. Specifically, budgets are government estimates that show how spending will be prioritized. The government ensures that it has provided services to its citizens without favoring any side through an effective budget.

It is worth noting that a budget is plan of how the government or an organization intends not only to spend revenue, but also how it intends to attain the revenue needed to cover all its spending. In most countries (the US included), governments keep away from profit-making businesses.

However, governments have a responsibility to provide certain services to the citizenry, it usually devise means of generating revenue. Among the most common revenue-generating avenues for government all over the world is taxation.

Since taxes are obtained from the citizenry, the governments have an accountability obligation of showing how the taxpayers’ money is spent. Budgets therefore serve as the means through which governments lay bare their financial records in order to allow public scrutiny.

An effective budget should have the following essential elements. It should be comprehensive, i.e. it should be able to cover a wide range of activities. It should coordinate; the budget drawn should be at the point of ensuring that all activities are performed without any inconveniences. As (Rubin 29) aptly states, a budget is a guide, which helps to keep an organization moving forward.

The main objectives for budgeting are meant to help in managerial functions of the government or the organizations. Budgets are mainly drawn to meet the following objectives:

  1. To focus on the management’s attentions from the current to future
  2. To affect the companies’ strategies and policies and help in resolving any monetary planning issues that may arise
  3. To help in making the financial analysis
  4. To help in decision-making
  5. To help managers in setting financial goals, and adopting the best strategy for the attainment of the same goals

Aptly put, budgets are used to set the standards that help managers to attain set goals (Steurle 19). As such, budgets are invaluable management tools , which are used to promote and coordinate financial planning in any organization.

The main aspects of a budget are the factors that influence comparative analysis of the budget. These factors include the incremental model, which contain aspects that affect the public policy making decisions.

Through these, the public is able to know how why a government handles monetary problems in a particular manner. As noted elsewhere in this paper, the public pays taxes to the government, and therefore has a right to know the reasons behind government actions.

The pursuit of development in different sector of the economy also makes budgets vital planning tools. As economists would readily tell, management factors such as planning, controlling, organizing, and lending require proper budget allocation if they are to contribute to the growth and development of a country or an organization.

Planning is especially essential to budgeting since it helps a country or an organization to identify its goals, objectives, and priorities. Budgets on the other hand, formulate the expected performance and it envisages ways in which they can be achieved easily.

Without such objectives, a plan lacks direction, and the organization or government lacks the capacity to forecast the threats, challenges, and opportunities that it may encounter in future. With proper planning and budgeting however, most organizational problems are detected in advance and hence controlled in good time (Jeffrey 53).

Budgets also have a controlling role (Birnhaum and Murray 34). Since they limit spending, budgets control just how much a government or an organization can spend in any given time.

Notably, even where funds are allocated to a specific task, the ‘budgeters’ usually expect to see the effect of the allocated money. As such, performance measures and appraisal strategies are usually implemented in order to determine whether the budget allocation meet identified objectives.

The controlling aspect of budgets has a number of benefits. These include recognizing the existence of various activities, directing government sectors or organization functions toward the most productive activities, and reducing the misuse of the company’s resources (Birnbaum & Murray 34).

As (Johnston 34) attests, control serves a strategic importance in any organization. Specifically, it ensures that issues are handled according to their importance, relevance, and priority. This in turn means that decision-makers are more responsible while deliberating about the right actions to take.

According to (Jeffrey 30), budget also promotes communication and coordination. Specifically, the budget helps ensure that there is a smooth running of activities within an organization by making high-level managers accountable for the spending in their departments.

It communicates the top manager’s plans to the lower people and it makes sure they get the right information according to the manager’s plans (Jeffrey 30).

Budgeting and forecasting

Forecasting is the aspect of predicting what will happen in future (Steuerle 19). As such forecasting identifies areas in an organization or government that needs attention.

Budgeters and planners are then able to align the available revenue to the priority areas established through forecasting. As forecasting take place, it is important to know that budgets are done in order to ensure that everything happens according to plan (Steuerle 19).

Some of the notable characteristics of budgets include the fact that budgets are expressed in monetary terms. Additionally, budgets are usually relevant to a specific, identified period, usually one (financial) year. Moreover, they reflect the manager’s commitment toward the attainment of the set goals (Johnston 34).

Most budgets are however not cast in stone; rather, they can be changed depending on the urgency of the conditions that prompt such changes. For example, when faced with economic crises, governments usually introduce supplementary budgets to cater for additional spending as prompted by different factors in the economy.

In most countries, good economical situations are brought about by efficient collection of revenue. Notably however, political instability is a drawback to revenue generation by government, since it jeopardizes the chances of enterprises and businesses to operate optimally without the fear of incurring losses.

Based on this, it is worth noting that the economy of a country is highly affected by the political environment therein. In stable political environments, governments collect revenue through several ways. Such include “borrowing and donations, revenue earned from corporation activities, grants, fines, escheat, and taxation among others” (Steuerle 19).

The 1986 ‘tax reform Act’

The 1986 ‘tax reform Act’ was designed to introduce tax neutrality in the country, following an increment in individual taxes and an increment in corporate taxes. This act was designed to be tax revenue neutral. These simplifications were very drastic and they reduced the tax bracket.

In this act, the highest income tax rates were lowered from 50%to 28%while the lowest rates were raised to 15%. The 1986 Act further necessitated the merging of different tax levels to form fewer comprehensible rates. According to (Jeffrey 53), the Act brought drastic changes in the U.S. income taxes, by harmonizing the tax-paying levels among the American population.

Tax Incentives

The ‘1986 tax reform Act’ increased the variables in a manner that favored investors who had tied their capital in personal occupancy houses. This action however did not favor people who lived in rental houses since there was an increment in mortgage interest reductions.

The amount of income the owner earns from an investment in owner occupied house had previously escaped taxation. These changes were good but they still had an impact since low-income earners were not able to own houses or get a mortgage to purchase their own houses.

Low-income earners were (and still are) more likely to continue living in rental house, compared to the high-income earners who can afford to purchase their own houses. These policy changes were very important since they encouraged investment in the economy in favor of the poor families (Steuerle 19).

Overall, the ‘1986 tax reform Act’ tax reform was considerate of the minority and the oppressed persons in the economy. As economists know, tax reduction targeting the low-income earners increases their disposable income. Consequently, they can afford to save some of their earnings for investment.

On the reverse, high tax rates imposed on low-income earners discourage investments. As such, the revenue authority should be attentive to ensure that there is fairness in taxation rates. As (Jeffrey 53) observes, high-income earners should pay higher taxes, while low-income earners should enjoy some kind of tax reprieve.

Pointedly, the market environment in any given economy affects the amount of revenue a government is able to generate. Where a market is laden with barriers, businesses find it hard to operate and thus do not generate maximum job opportunities, and income.

According to (Steuerle 19), high taxes are among market barriers that discourage investments. Additionally, high taxation reduces the disposable income in the consumer market, and as (Jeffrey 53) observes, people make rational choices when prioritizing their spending, meaning that people only spend their money on essential items only.

The process of reform was of great importance to the citizens of the United State, since it set a precedent of tax removals and reductions. The low-income earners specifically benefited from the reform since they could afford to spend and save some of their earnings.

As (Jeffrey 53) notes, the introduction of the reforms even led to an improvement of the pension plan, since more people (especially in the low-income group) were able to save more. It is no wonder, therefore, that the ‘1986 reform Act’ is remembered as an important development in the US taxation history.

The Act also underscored the importance of people to claim their tax returns as a manner of obtaining social security benefits (Jeffrey, 53).

In conclusion, it is worth noting that the reform process was of great success. This is because it sailed through and it brought great changes to the citizens’ lives. Tax control measures were especially relevant to low-income earners, who benefited from lowered taxes.

Work Cited

Birnbaum, Jeffrey, and Murrary Alan. Showdown at Gucci Gulch; Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform. New York: Vintage Books. 1987, Print.

Johnston, David. Tax Law Was Cited in Software Engineer’s Suicide Note. The New York Times, Feb. 18, 2010. Web.

Jeffrey, Liebman. “Who Are the Ineligible EITC Recipients?” National Tax Journal 53. (2000):1165-1186.

Rubin, Irene. The Politics of Public Budgeting: Getting and Spending, Borrowing and Balancing. 5th ed. Washington, D.C.: CQ Press, 2006. Print.

Steuerle, Eugene. Contemporary U.S. The Urban Institute Press. Washington, D.C.: The Urban Institute Press, 2004. Print.

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