What Are Cyclical Taxes?

Cyclical taxes are taxes that are affected by the business cycle. They are levied on goods and services that are in high demand during economic booms and are reduced when economic activity declines. The aim is to help stabilize the economy by reducing the impact of economic volatility.

Types of Cyclical Taxes

There are two types of cyclical taxes. The first is taxes that are levied on goods and services that are sensitive to economic growth, such as sales taxes. As the economy expands, consumption increases, which leads to higher tax revenues. Conversely, during economic downturns, consumption declines, which lowers tax revenues.

The second type of cyclical taxes are those that are levied on income and wealth. During economic expansions, incomes rise, which leads to higher tax revenues. During economic downturns, however, incomes fall, which reduces tax revenues.

Advantages of Cyclical Taxes

Cyclical taxes help to stabilize the economy by reducing the impact of economic volatility. During times of economic contraction, government spending typically increases as a result of increased demand for social services. This puts pressure on government finances, which can lead to ballooning budget deficits. Cyclical taxes help to offset this by providing automatic stabilizers that reduce the need for spending cuts or tax increases during economic downturns.

Disadvantages of Cyclical Taxes

There are several disadvantages to cyclical taxes. The first is that they can lead to reduced economic activity during economic expansions. This is because higher taxes can discourage consumption and investment, which can lead to lower growth rates.

The second disadvantage is that cyclical taxes can be regressive, meaning that they impact lower-income households more heavily than higher-income households. This is because lower-income households spend a larger proportion of their income on goods and services that are subject to cyclical taxes.

Conclusion

Cyclical taxes are an important tool for stabilizing the economy during times of economic volatility. They help to offset the negative impact of economic downturns on government finances and reduce the need for austerity measures. However, they can also have disadvantages, such as reduced economic activity and the potential for regressive impact on lower-income households. As such, governments should carefully consider the use of cyclical taxes when designing their tax policies.

Cyclical fiscal policy is a non-interventionist approach to taxation. Local taxes that are handled with a cyclical fiscal policy follow the trends of the market. Cyclical policies are most often adopted when the local and state governments are not running a budgetary deficit and the state economy is doing well.

The cyclical fiscal policy is the states means of keeping tax policy stable during a periods of economic stability. State lawmakers are generally non-interventionists in good times because the idea is not to break something
that works. Opponents of cyclical fiscal policy are proponents of countercyclical fiscal policy. State legislatures who adopt cyclical fiscal policies believe that neither taxes or services should be touched regardless of changes in revenue. No economy is completely immutable, therefore, cyclical fiscal policies are adopted under specific conditions. During periods of economic boom, Democrats believe that taxes should be cyclical. Republicans, on the other hand, believe that fiscal policy should be countercyclical during an economic boom because they wish for more economic growth.

Cyclical fiscal policy, however, is a function of political conservatism during a recession period because they assume that the market would correct itself automatically. Liberal lawmakers, on the other hand, agree that countercyclical fiscal policy measures are necessary to prevent the economic engine from stalling. Because cyclical taxes are the preferred strategy of fiscal policy during a recession period, the government is more likely to cut services to preserve the solvency of the government. The countercyclical and Democratic approach to management of an economic recession lends to increased tax rates across the board. Politically, neither of these methods are popular and add to the complexities of tax code. This is mainly why, income tax codes contain so
many bizarre and counter-intuitive loopholes manifested in tax deductions and tax credits on income and purposes.

The system of taxation that is adopted in states with credits and deductions is thought to be a hybrid between services and taxes to create market incentives and stimulation. Staunch supporters of cyclical fiscal policy disagree with any type of deduction of credit because they believe its a form of social engineering.
Proponents of cyclical fiscal policy believe that government intervention in the economy is only necessary when the viability of the market as a whole is compromised or in clear and present danger of being compromised. Cyclical fiscal policy is the preferred means of raising taxes among classical capitalists and libertarians. Democrats and Republicans believe in cyclical taxes under specific conditions. The primary motivation of all lawmakers, however, is to ensure the greater good. Cyclical fiscal policy is only necessary during times in which it is considered of national interest. Some, however, simply believe that it is in the best interest of a nation maintain fiscal policy constant instead of reactionary.