What Is a Fiscal System?
A country's fiscal system is the complete structure of government revenue and expenditures and the framework within which its agencies collect and disburse those funds. This system is governed by a nation's economic policy, which comes from decisions made by the governing body. Businesses must understand a country's fiscal system to operate effectively within its borders; likewise, countries must sustain stable fiscal systems to encourage long-term investment..
Direct taxation is a method that many fiscal systems employ to raise government revenue by requiring taxed parties to pay money directly to the government. Two common examples of direct taxation are individual income tax and corporate income tax. In both of these cases, the person or company paying the tax must report their total amount of taxable income to the government and pay a percentage of this amount, minus any applicable deductions, by a certain time. Another common form of direct taxation is a tariff, which is a tax placed on items shipped across international borders.
Indirect taxation is any tax collected and paid by a private entity other than the one that is actually paying the tax. Examples include sales tax, which is common in the U.S., and value added tax, which is common in Europe. A consumer who purchases an item on which the government levies a sales tax generally must pay the tax in addition to the purchase price. In a value added tax system, manufacturers pay a tax on the value they add to a raw material or simple item by refining, processing or assembling it, and the manufacturer passes the weight of this tax on to the consumer by adding to the price of the product. Another common type of indirect taxation is an excise tax, which is an additional sales tax that a government places on a specific items. Excise taxes generally are charged on a per-unit basis, such as a gallon of gasoline, rather than as a percent of the price.
Governments also raise revenue by charging fees for their services. Individuals and organizations that apply for licenses, for example, generally must pay a fee for the license and for each renewal. Likewise, when people or companies are found guilty of violating laws or regulations, they may be assessed fines, cash penalties which usually go into the government's general fund.
In some nations, the government raises revenue by taking over an entire industry and making it a public enterprise. Mining and petroleum drilling are two enterprises that governments often take out of private hands for the sake of raising revenue. In the U.S., some states hold a monopoly on the sale of alcoholic beverages.
Just as a fiscal system may use various ways to gather revenue, it may also spend government money in any number of ways. Most modern fiscal systems, for example, rely on government to build and maintain infrastructure items like roads, bridges, railways, pipelines and canals. This government investment often leads to higher private sector revenues, which themselves result in high income for the government. Other common types of expenditures fund military forces, civil defense forces, education, health care and welfare programs.
The greatest controversy regarding fiscal systems stems from the question of whether governments should levy high taxes and interfere extensively in private industry or whether they should levy low taxes and interfere in private industry only when necessary. Business owners tend to argue that limited intervention leads to a better economy that is beneficial to everyone, while others argue that such minimal government intervention leads to unfair distributions of wealth, inadequate public infrastructure, and insufficient regulation to protect average consumers..