B Com Exam > B Com Notes > Public Finance > Capital Levy & Deficit Financing - Public Expenditure, Public finance
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Capital levy
A capital levy is a tax on capital rather than income,collected once rather than annually. For example, a capital levy of 30% will see an individual or business with a net worth of $100,000 pay $30,000 in tax, regardless of income. It is considered difficult for a government to implement, as the confiscatory nature of taxation is more apparent than with income tax. Thus, once such a levy is enacted, capital flight is likely to ensue.
Examples of capital levies: the Italian government of Giuliano Amato imposed a 0.6 percent levy on all bank deposits on 11 July 1992; and the Cypriot government levied 47.5 percent of Bank of Cyprus deposits over one hundred thousand Euros in July 2013.
Some economists argue that capital levies are a disincentive to savings and investment, but others argue that in theory this need not be the case. The latter view has gained some acceptance as more and more heavily indebted nations struggle to raise revenues; in October 2013, the International Monetary Fund released a report stating, "The sharp deterioration of the public finances in many countries has revived interest in a 'capital levy' – a one-off tax on private wealth – as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior."The next year the Bundesbank proposed that Eurozone countries should attempt a one-off levy of bank deposits to avoid bankruptcy.
A February 2014 report by Reuters showed the idea had gained traction in the European Commission, which will ask its insurance watchdog later that year for advice on a possible draft law "to mobilize more personal pension savings for long-term financing".
Deficit Financing
Deficit refers to the difference between expenditure and receipts. In public finance, it means the government is spending more than what it is earning. Government expenditure and revenue can be split into capital and revenue. Capital expenditure generally includes those expenses which result in creation of assets. Revenue expenditure is primarily that which does not result in asset creation
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FAQs on Capital Levy & Deficit Financing - Public Expenditure, Public finance - Public Finance - B Com
| 1. What is a capital levy and how does it relate to public expenditure? |  |
Ans. A capital levy is a form of taxation imposed on individuals or businesses based on their wealth or assets. It is typically implemented during times of economic crisis or when there is a need for additional revenue for public expenditure. The capital levy aims to redistribute wealth and provide funds for government projects or initiatives.
| 2. What is deficit financing and how does it impact public finance? | |
Ans. Deficit financing refers to the practice of a government borrowing money to cover its budget deficit. It involves the issuance of government bonds or other debt instruments to finance public expenditure when tax revenues are insufficient. Deficit financing can have both positive and negative impacts on public finance. It can stimulate economic growth by funding infrastructure projects or social welfare programs but may also lead to increased government debt and interest payments.
| 3. How does a capital levy differ from deficit financing in terms of funding public expenditure? | |
Ans. A capital levy and deficit financing differ in terms of their sources of funding for public expenditure. A capital levy directly taxes the wealth or assets of individuals or businesses, providing immediate revenue for government projects. On the other hand, deficit financing involves borrowing money from the public or financial institutions, which results in the accumulation of government debt that needs to be repaid over time.
| 4. What are some advantages of implementing a capital levy for funding public expenditure? | |
Ans. Implementing a capital levy for funding public expenditure can have several advantages. Firstly, it can promote wealth redistribution and reduce income inequality, as it targets those with higher levels of wealth or assets. Secondly, it can provide a one-time injection of revenue for government projects without the need for borrowing or increasing the national debt. Lastly, it can be seen as a fair and equitable way to finance public expenditure, as it places a higher burden on those who have accumulated more wealth.
| 5. What are some potential drawbacks or challenges associated with deficit financing for public finance? | |
Ans. Deficit financing can pose several challenges for public finance. One potential drawback is the accumulation of government debt, which can lead to higher interest payments and future financial burdens. Additionally, deficit financing may result in inflationary pressures if the increased money supply is not properly managed. Moreover, reliance on borrowing can make the economy vulnerable to changes in interest rates and investor confidence. Lastly, deficit financing may also lead to a crowding-out effect, where private investment is reduced as the government competes for available funds.
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