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Original Research
PAGE NO.
5-14
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SUBMITED
22 May 2025
ACCEPTED
17 June 2025
PUBLISHED
07 July 2025
VOLUME
Vol.05 Issue07 2025
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© 2025 Original content from this work may be used under the terms
of the creative commons attributes 4.0 License.
Fiscal Policy: An Economic-
Philosophical Review of
the Power State
Ali Kamil Baiwy
Faculty of Administration and Economics, University of Kufa, Iraq
Abstract:
It is necessary to present the historical
development of the role of the state and the scope of its
intervention in social and economic life, so that this
concept can be clarified.
Considering that the first part of the term (politics)
includes a number of meanings, among these meanings
is that politics is nothing but a set of procedures,
measures or positions taken by an authority in a certain
field. The nature of the state's role and the limits and
areas of its intervention in public life will certainly have
a clear impact on drawing up that policy.
In order to give a clear picture of the development of
the state's roles in the areas of life, these roles will be
studied starting from the establishment of the nation-
state until the present time, and those roles of the state
will be discussed according to the intellectual schools
that have emerged throughout history.
Keywords:
Economic school, state, financial policy.
Introduction:
The importance of the research
: The
importance of the research stems from the fact that it
addresses one of the issues of great importance to
economic theory through a theoretical review of the
economic ideas of economists and identifying the
similarities and differences between economic schools
and identifying the most important treatments provided
by these schools.
Research objective
: The research aims to highlight the
main roles of the historical development of economic
schools for the concept of fiscal policy throughout the
development of economic theory, and the importance
of playing the main roles in addressing the problems
facing the global economic structure.
Research problem
: The problem of the research lies in
the fact that most schools emphasized that their ideas
alone are the ideas that can be relied upon to explain
the performance of fiscal policy. Some of them criticize
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fiscal policy and limit its role, while others make all
market interactions the responsibility of fiscal policy.
Research hypothesis
: The research is based on the
hypothesis that fiscal policy has evolved over time
through different points of view that have played a
fundamental role in directing fiscal policy in the right
direction, relying on all opposing and supporting
opinions for its importance.
The intellectual disagreement of economic schools on
the role of fiscal policy constitutes one of the basic
pillars in the fields of scientific research in economics.
When referring to most of the economic trends that
contradict and agree on the concept of fiscal policy and
the optimal way for the state to act in the tools of this
policy, we note that most of these schools adopted an
economic approach that is opposed to the school that
preceded it. This difference in viewpoints is due to the
fact that these schools adopt the treatment of
economic issues that occurred at a certain time and
were basically the ones that led the economic decision.
Throughout the ages, classical ideas were and still are
a turning point in the performance of fiscal policy by
calling on the state not to interfere in the market in any
way, because this, according to their point of view, has
negative effects on economic performance and makes
the market balance itself, believing in the state of the
invisible hand responsible for restoring the market to
balance. In contrast, the Keynesian school came
criticizing all classical views and presented a new
model after the Great Depression in 1929, as this
school adopted the decisive role of the government in
economic activity and the role of the state to be
interventionist in all economic joints and activities. In
order to restore the market equilibrium and activate
the aggregate demand to achieve economic stability,
then came the Chicago School claiming that economic
activities do not work efficiently whenever there is
government intervention, and that achieving economic
stability requires that monetary policy be responsible
for the performance and activities of the market to
control inflation and address unemployment, and thus
achieve the state of full employment. These opinions
and others will be addressed in this research to reach
results that prove the right of economic schools to
prove their points of view, and the importance of
having a theoretical balance to clarify the main roles of
these schools.
The first section: Financial policy according to ancient
schools: the beginning of development
First: The commercial school
The end of the fifteenth century AD is the beginning of
the emergence of the nation-state in Europe, as that
era witnessed the disintegration of feudal relations
and the collapse of the feudal system and the weakness
of the power of the feudal nobles. This collapse was
facilitated by the interaction of several factors, including
the increase in population and the increasing demand
for food and the weakness of the closed economic
system that prevailed in that era and its inability to
provide food for the population, as well as the
Renaissance movement and religious and social reform
that Europe witnessed and the movement of
geographical explorations and other factors that played
an important role in the collapse of the feudal system
and paved the way for the emergence of the nation-
state. (Al-Jubouri: 1987: 84)
After long wars, the nation-state was formed. This
country began to seek to build its military, political,
economic, financial and commercial powers, and these
countries began to feel that the source of their strength
was the precious mineral wealth they possessed, such
as gold and silver. Thus, these countries began to
compete to obtain these two metals, until that era was
called the era of (the two metals), in reference to the
utmost importance that the precious metal occupied for
the countries.
With the expansion of countries, each country became
required to take measures and procedures that would
increase its financial resources. Countries resorted to
issuing legislation according to which taxes were
collected from individuals as the first source of revenue,
and other countries increased their commercial activity
in order to achieve their goals. In those circumstances,
ideas and theories were generated that glorified and
organized the commercial work of individuals, called the
commercial doctrine, whose ideas began to drive the
commercial activity of the state. Among the most
prominent economists who had an interest and passion
in organizing the financial affairs of the state are: the
two Germans (Van Goste (1717-1771)) and (Dares
(1714-1791)), so we can say that the beginning of
interest in public financial affairs in their organized form
can be attributed to these two thinkers as a result of the
work they did to organize the resources of the state
treasury and classify its expenditures, so that they used
the term (camera) in the German language to indicate
the place where the state treasury is located, and the
state's revenues were generally composed of taxes,
customs duties and domain. (Salman: 1984, 166)
The economist (William Petty) (1623-1687) also had an
important impact on organizing the financial and
accounting aspects of the state.
The economic philosophy of the state's role according
to the commercial doctrine lies in the following
(Othman: 2018: 22)
The state must be strong, and their theory is often called
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(the economy of power).
The state must strive in various fields to increase its
wealth and consider wealth as a source of power.
Seeking to make the trade balance in a state of surplus.
It is noted from the ideas brought by the mercantile
doctrine and its supporters that it has always tried to
give special importance to the political aspect of the
state and its intervention in public life. This interest
may be due to the nature of the stage in which the
nation-state emerged. On the other hand, mercantile
ideas called for the necessity of subjecting foreign
trade to complete state control and the size of the role
of the private sector.
Among the manifestations of state intervention with
merchants is the imposition of customs duties on
imports with the aim of preventing them and
protecting local products and providing financial
revenues to the state treasury. The other
manifestation is represented by state intervention in
helping emerging industries by reducing customs
duties on raw materials that enter into these
industries, as well as granting privileges and providing
export subsidies for the purpose of producing and
exporting certain goods. Other aspects of state
intervention include determining wages and prices and
establishing industries for goods.
Second: The first classical school: This role of the state
was linked to the ideas of the classical school, whose
ideas became popular in the nineteenth century, and
whose most prominent pioneers were (Adam Smith)
(1723-1790) and (Ricardo) (1772-1823), and this
The school called through its ideas for freedom of work
and economic activity and the principle of competition,
which it believed were sufficient to create a society
governed by justice and progress, and that competition
and freedom of work were sufficient to achieve
economic stability without any interference from the
state (Kanaan: 2011: 33). Among the other principles
that the classicists believed in was the state of
economic equilibrium and full employment. If the
economic system is left to operate normally without
any interference from the state, then its interference,
according to their belief, will hinder the mechanism of
automatic equilibrium and thus generate undesirable
negative effects. This idea of economic equilibrium was
based primarily on the law of markets of the French
economist (Say), which states that the total supply of
goods and services will generate demand for it and
equal it. There is no surplus in the supply or demand
for goods. Therefore, any intervention by the state in
economic life will lead to an imbalance in the economic
balance and thus the occurrence of economic crises
that will increase its public spending and lead to an
imbalance in the financial balance, the effects of which
will appear in the economic balance. Therefore, the
state must be neutral. (Al-Dulaimi 1991:66)
The main idea of classical thought is to limit the role of
the state and limit it to some necessary matters and
satisfying public needs that the private sector cannot
do, such as defense, security, justice, and some public
utilities. In order for the state not to exaggerate in
satisfying those needs, the classicalists have established
some rules, including:
- The rule of tax and spending neutrality1
By neutrality, we mean the state not influencing the
decisions and actions of individuals in the private sector
by imposing taxes or implementing public expenditure.
2- The rule of budget balance
This rule requires that the state's public expenditures be
equal to its public revenues, so the state must estimate
its public expenditures within the limits of its public
revenues and in a way that allows for satisfying the four
widows, as they call them (defense, security, justice, and
some public utilities).
As for revenues, the state covers its expenses from its
regular revenues such as the public domain, and if it is
not sufficient, it can resort to taxes. The classicists prefer
taxes that reduce the state’s interference in the
freedom of individuals, such as indirect taxes, and do
not prefer direct taxes that affect individuals’ cash
income and thus affect savings, which they consider the
main factor in forming capital. (Al-Jamal: 2006, 12) The
classicists also demanded that the state not resort to
issuing money or public loans to cover its public
expenses except in exceptional cases and when
necessary and under special conditions such as wars, as
they believeClassic: The method of issuing cash to
finance public spending is not preferred because it is a
hidden tax, as cash issuance will lead to an increase in
the amount of money in circulation, and thus an
increase in price levels and inflation.
In addition, borrowing from within will lead to the
emergence of competition by the state with the private
sector for loanable funds, and then the emergence of
what is called the crowding-out effect, and thus the
private sector's ability to finance its investments will
decrease. (Othman: 2011: 32).
Tax according to Classic:
Taxes are the most important tools of financial policy
because they are one of the important sources of
revenue that flow into the state treasury. Countries
have resorted to them in the past to finance their public
expenditures, and their importance has increased as a
result of the expansion of countries and their
intervention in economic and social life. Today, taxes
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have become, in addition to being a source of revenue,
a tool for achieving economic stability, addressing
economic fluctuations, and a tool for distributing
income among individuals and directing investments in
a way that serves the general goals of economic and
social development. There are some theories that have
tried to explain the legal basis on which the state
imposes taxes, including the theory of the (financial
contract) formulated by (Hobbes) and (Locke) at the
end of the eighteenth century and the beginning of the
nineteenth century. This theory was later developed by
the Frenchman Jean-Jacques Rousseau and was later
called the theory of the (social contract), which
believes that there is an implicit contract between the
state and individuals. This contract is of three types:
1- Business lease contract: According to this type of
contract, the tax is the price of the services provided
by the state to individuals.
2- Insurance contract: Those who support this trend
believe that the tax is like insurance premiums paid
annually by individuals in exchange for obtaining
security, stability, and preserving their lives and
money.
3- Partnership contract between the state and
individuals: The state is like a company, and individuals
are the partners.
Then the theory of social solidarity emerged, which
considers that individuals must show solidarity with
each other, each according to his ability to meet the
burdens of the costs borne by the state.
This is due to the nature of its sovereign role and the
care of its individuals. This is a monopoly right for it
similar to its right to issue currency. At the same time,
the tax is a duty on every individual in harmony with
the principle of social solidarity in bearing the public
burdens of the state. The state must take into account
the social and economic circumstances of its
individuals and the extent to which they bear these
burdens and allocate tax revenues to the public
interest and not the individual interest (Talal, Kadawi:
1990: 136).
Supporters of this type of tax, such as Van Gooste and
Adam Smith, believe that this type of tax is
characterized by justice and equality among
individuals, as everyone is subject to the same price,
regardless of the size of their wealth. It is also
characterized by the ease of imposing and calculating
it, but in reality this tax is far from justice because it
does not distinguish between the rich and the poor.
Tax justice: The rule of tax justice is the most important
basic rule governing the imposition of taxes, in addition
to other rules represented by the rules of suitability
and certainty, as well as the rule of economy. The issue
of tax justice has received the attention of many
financial writers and has been the subject of much
controversy, especially since one of the conditions for
imposing taxes is to take into account justice among
individuals (those liable) for the tax. Based on the fact
that justice is equality, this equality takes two forms:
A- Horizontal equality: Under this equality, all
individuals are equal in paying taxes as long as everyone
benefits from the services provided by the state to
them. It is noted that the origin of this equality is based
on the principle of utilitarianism, and the first to
demand this equality were the ancient classicists such
as (Adam Smith) and (Van Gooste). The proponents of
this rule believe that taxes whose prices are fixed for all
individuals (proportional taxes) are what achieve justice
among individuals.
But in reality, if we consider this equality to be absolute
equality, it does not achieve justice because it will have
a greater impact on those with low incomes than those
with high incomes if both pay the same amount of tax
based on equality. Likewise, if we consider this equality
to be relative, it will be apparent equality unless the
incomes of all individuals are equal. Horizontal equality
between individuals is based primarily on the principle
of utilitarianism that we have referred to, and the
principle of sacrifice of income. In return for individuals
benefiting from the services provided by the state, their
sacrifice of income must be equal, which is a necessary
principle for the classicists in order to achieve tax
justice.
The second aspect: If we assume the opposite, that is, if
we assume that individuals' incomes are equal, and this
matter, as mentioned above, cannot be imagined, but
to justify the subject, we will assume that they are equal
and thus the sacrifice of individuals from income will be
equal, and this case will result in the benefits for all
individuals being equal, and this is very difficult. From
this, we conclude that the principle of horizontal
equality is flawed by some distortions in the aspect of
justice, and this leads us to discuss the other type of
equality:
B- Vertical equality: According to this type of equality,
individuals who are not equal in their ability to pay are
treated differently, which means that the (tax burden)
that individuals will bear will differ from one individual
to another, and according to this ability to pay, if justice
is to be applied, we see that the owners of this
principleThey relied on introducing variables subject to
quantitative measurement such as income, consumer
spending or wealth of individuals and replacing them
with the principle of sacrifice that is not subject to
measurement.
In line with the principle of vertical equality, taxes
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imposed on individuals are not determined according
to the personal benefit that each individual obtains
due to the difficulty of measuring the extent of benefit
for individuals, but rather the imposition of taxes by
the state is subject to its assessment of the extent to
which individuals bear public burdens according to
their ability to pay and the extent of their contribution
to social solidarity and bearing these burdens. Here,
the tax is of a general nature, thus achieving the rule of
(generality of taxes), but this does not mean that this
rule is free of exemptions or exceptions, but there are
some exemptions that the state grants to individuals
and institutions, taking into account several reasons
that may be social, economic, administrative or
political.
In light of this, the proponents of this principle of
vertical equality were able to justify progressive taxes
whose prices rise with the increase in the taxpayer's
income or wealth, considering that the more the
taxpayer's income increases, the higher the tax rates
that he must pay. In conclusion, we can say that the
issue of tax justice is a thorny and complex issue that
includes many opinions and debates in an effort to
achieve it. Whether taxes are organized according to
the principle of horizontal or vertical equality, the tax
legislation law remains primarily subject to the political
decisions of the government and the extent of its
understanding of the economic and social status of
individuals. Through the reality of the legislation of the
tax systems of different countries, we see that they
used various financial arts to impose taxes. Some
countries legislated taxes in consideration of their
economic status without studying the social status of
their individuals, and others tried to apply the tax law
to combat luxury consumer areas and encourage
productive areas, and others imposed a tax law
through which they could redistribute wealth among
individuals. Thus, these countries were able to
combine the principles of (benefit) and the ability to
pay to achieve their goal of imposing taxes. Third: The
Keynesian School: The Interventionist Command State
When the Great Depression occurred in 1929 and the
economic problems worsened, represented by the
increase in the supply of goods and the increase in their
stock, the shutdown of many industrial facilities, the
layoff of workers, the emergence of unemployment,
which reached rates of about 25%, and the decline in
wages, the classical theory failed to find a reasonable
explanation for this crisis because it originally did not
believe in the occurrence of such crises, as it believed
that the state of economic equilibrium is the prevailing
state and the imbalance is an exceptional or temporary
state that quickly turns into equilibrium.
This crisis has proven the weakness of the classical
theory and its inadequacy in dealing with crises, and
that the principle of freedom and competition in which
the theory believed later gave birth to a monopolistic
capitalist society in which misery and poverty prevail
among most of its members, especially the working
class. The capitalist system witnessed a major
intellectual transformation after this crisis occurred,
especially after the emergence of the ideas of
economist (John Miner Dickens) which he put in his
famous book (Shaqir: 1990: 66) (The General Theory of
Employment, Interest and Money). Through his ideas,
he called for increasing the role of the state and
expanding its functions to include all areas of life and
moving beyond its traditional functions and abandoning
the policy of freedom of economic activity and non-
interference in order to stimulate effective aggregate
demand, which he sees as the main key to getting rid of
this crisis and addressing high levels of unemployment.
This demand by (Keynes) for state intervention and
expanding its economic activity was based on several
considerations, including economic considerations that
push the state to intervene to address economic crises
such as depression and inflation, and social
considerations that aim to achieve a high degree of
social welfare for individuals by providing them with the
best goods and services at symbolic prices such as
health, education, housing and other services, in
addition to financial considerations. When the state
budget witnesses a surplus, this requires raising the
level of services it provides to individuals and increasing
its infrastructure and moving away from the idea of
balancing the budget and not resorting to loans that the
classicists believed in. (Al-Zubaidi: 2018: 397)
Hence, the state became in need of taking certain
measures and procedures through which it plans its
public expenditures and manages its sources of revenue
in line with its general objectives. These measures and
procedures related to the financial aspect are what is
called fiscal policy, and this term developed as a result
of the development of the state's role, as this term
remained synonymous with the concept of (public
finance) for a period of time, then crystallized and
became clear and distinct from the concept of public
finance despite the difference in writers in giving a
specific definition of it. Fiscal policy is defined as: (The
use of the general budget to direct the economy
through the deliberate adjustment between tax rates
and the level of government spending to achieve a
desired level of income and use). (Mr. Ali: 1984, 154)
Some economists define it as: (deliberate government
efforts and attempts to achieve full employment
without inflation through spending and tax policies)
Others see fiscal policy as nothing but the use of the
general budget to achieve overall goals such as full
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employment, achieving long-term economic growth,
and stabilizing the general price level (Khalil: 1992:
28)As for Hisham Muhammad Safwat Al-Omari, his
view of financial policy is more comprehensive than
the previous ones, as he explains it: (as the path taken
by the government to plan its expenditures and
manage its financing means as it appears in the general
budget, which may tend towards economics in public
expenditures and limit itself to performing basic
services and thus adopt the principle of neutrality or
tend towards expanding its expenditures by replacing
public activity with private and intervening in the
production of some goods and correcting the defects
of capitalist devices and stopping the risk of crises and
limiting economic cycles and narrowing the disparity
between individuals' incomes and amending the
foundations of economic construction and adopting
the nature of intervention or even reaching the
socialist nature through its ownership of the means of
production) After this presentation of some concepts
of financial policy, the researcher believes that the
appropriate definition of financial policy is: a set of
procedures and measures taken by the government in
the financial field by determining its sources of
revenues and the appropriate spending aspects of
these revenues in an effort to achieve the desired
goals. (Al-Omari: 1986: 401)
Third: The Chicago School:
There was a great deal of controversy and wide
discussion between supporters of the Keynesian
school and other economic schools in terms of the
principle of choosing the appropriate policy to achieve
the goals of stability and full employment. Among the
most prominent schools that called for this discussion
and debate is the school of monetarists and its most
prominent
pioneers
(Milton
Friedman).
This
controversy focused on the nature of the appropriate
policy to achieve the above goals. The Keynesian
school believes that it is necessary to rely on fiscal
policy with its tools (taxes - public spending) and
prefers it over other policies. Keynes considers the
general budget an effective weapon in confronting
unemployment
and
inflation
and
achieving
investment. As for the monetarists, on the contrary,
they believe that monetary policy serves the same
purpose as fiscal policy in achieving the desired goals.
Monetarist school's interpretation of the state of
instability:
The monetarist school is based on the classical ideas
based on the quantity theory of money, which believes
that the quantity of money leads to changes in price
levels. It also assumes that prices and wages are highly
flexible according to the economic situation, being low
in cases of depression and high when the economy
reaches full employment.
The school relied in the essence of its analysis on the
principle of freedom of work and avoiding state
intervention except in certain areas. Based on this
principle, the state of stability in the market is the
common state and instability is only rare cases.
In contrast to Keynesian ideas, which assumed that
money is not a basic factor behind economic Monetary
school explains price fluctuations through the decrease
in the volume of investment and consumption (Al-
Jabouri: 2006: 56). On this basis, the Keynesian school
explained economic fluctuations and price fluctuations
through the mechanism of aggregate supply and
aggregate demand. The monetary school attributes
price fluctuations to the change in the quantity of
money supplied in the short and long term periods
(Behravesh: 1988: 379). Friedman believes that the
relationship between changes in the quantity of money
and price levels is not dynamic, but can be affected by
changes in the volume of production and the amount of
money that individuals wish to keep in the form of cash
balances, which he considered a luxury form of keeping
money. In Friedman's opinion, it is a relatively
independent change in the long run, and depends on
the size of the individual's real income (wealth) and the
cost of keeping money, which is equivalent to the
interest rate on other non-cash assets, which depends
on the general level of prices or inflation. (Al-Jubouri:
2006: 83) As for the other factor, the volume of
production, which Friedman considered an independent
variable, it is not a fixed amount as assumed by classical
theory. Therefore, critics believe that the depression
crisis that occurred during the years 1929-1932 was
caused by a shortage in the money supply. The inflation
that occurred in the late sixties and mid-seventies was
attributed to the increase in the money supply (Al-
Dulaimi: 1990: 316)
The state of economic stability:
The other issue is the state of economic stability and
reaching the level of comprehensive employment, as
supporters of the monetary school believe that the
authority to manage the money supply is always
responsible for that in an economy that operates by the
free market mechanism, and growth rates in the money
supply must be fixed, ranging between 3-5% to avoid
inflation and deflation. On the contrary, Keynesians
believe that the market mechanism in a free economy is
rarely the one that affects the stability of the economy,
and the equilibrium level of income can be below the
state of full employment, because the Keynesian theory
assumes that monetary wages are fixed downward, so
unemployment can exist for a long time, and this has led
Keynesians to believe that there is nothing to prevent
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inflation from occurring even if the money supply does
not increase, as it is possible to use the policy of
managing aggregate demand to stimulate an economy
that suffers from a high rate of unemployment and has
idle economic resources. Increasing public spending in
all Its components will work to increase production
without increasing prices until the economy reaches
full employment, and such an expansionary fiscal
policy will not be affected in its effectiveness in
addressing the deflationary gap. However, if the
economy does not have idle economic resources, i.e. it
is operating at its maximum production capacity, then
adopting an expansionary fiscal policyfluctuations (as
Keynesians believe that there are other non-monetary
factors in addition to the publicRaising the level of
aggregate demand will also raise the general level of
prices, and thus an inflationary gap will occur. To
prevent such a gap, the financial authority must be as
careful as possible in predicting the use of appropriate
financial policy (Edgeman: 2004: 183)
Effectiveness of financial policy:
Regarding the effectiveness of financial policy from the
point of view of monetary scholars, (Friedman)
believes that the expansionary financial policy that
Keynes set to address the crises of depression and raise
employment levels has a limited ability in its
effectiveness and achieving its goals. (Milton
Friedman) believes that the principle of (the intended
budget deficit, if it is financed by assumption in
addition to the available local resources (assuming the
stability of the money supply), this will lead to an
increase in interest as a result of the increase in the
government's demand for loans, and the effect of the
rise in the interest rate will appear on the volume of
private investment, in which the interest rate plays a
major role in determining its size. The rise in the
interest rate will lead to a decrease in the volume of
private investment, and thus the budget deficit policy
based on increasing public spending and financed by
loans, as we mentioned, will lead to the emergence of
the crowding-out effect and the displacement of
private investment from economic activity to be
replaced by public investment (discussion :2014:74) It
is no secret that any decrease in private spending
(investment + consumption) will at least lead to a
reduction in the expansionary effect generated by
increasing government spending due to the multiplier
effect. Therefore, the main goal (reaching full
employment) is difficult to realize because new
government activities add additional effort to the
workforce but do not expand the new employment
capacities in the economy and absorb unemployment
resulting from the displacement of the private
investment sector. Monetarists believe that this
method will lead to a small increase in the size of the
national product in the long term (Guartini: 2006:315).
Therefore, monetarists believe that increasing public
spending must be financed in a way other than
borrowing from citizens, but rather through the
issuance of new money or increasing taxes. If it is
financed through the issuance of new money, it will
inevitably lead, according to the opinion of monetarists,
to a large increase in the size of production without
displacing private capital. However, if it is financed
through increasing taxes, the effect of that will lead to a
small increase in the product in the long term due to the
decrease in investment as well due to the small
expected profits. Keynesians respond to this by saying
that increasing public spending will indeed lead to an
increase in the demand for money, as the monetarists
claimed, but it will raise the interest rate. However, this
increase will be very small and not as the monetarists
expected, because the demand for money is governed
by three motives: (demand for the purposes
ofTransactions, demand for precautionary purposes and
demand for speculative purposes) and therefore
demand does not depend on the interest rate only but
also on income (Al-Suwaidi: 2000: 187).
On this basis, the effect of crowding out private
spending will be very small and imperceptible, and
therefore the expansionary effect of fiscal policy will not
decrease and its effectiveness will not be affected.
If the central bank follows an expansionary monetary
policy by purchasing government bonds from the
market, thus increasing the amount of money in
circulation and maintaining the stability of the interest
rate, the same is the case if private investment is not
flexible with respect to the interest rate, then the
increase in the interest rate resulting from the
expansionary fiscal policy will not greatly affect the
volume of private investment.
Section Two: The Actual Effects of Taxes:
In the field of drawing up tax policy, it is necessary to
study the reactions of individuals towards the different
levels of tax, taking into account that any tax imposed
on a specific productive activity may be a source of
economic inefficiency due to the low level of this activity
despite being a source of financial resources that it
generates for the state treasury.
In this regard, it is appropriate to study the economic
effects of taxes on three levels, namely:
The effect of taxes on labor supply:
There is no doubt that imposing a tax on the worker's
income will inevitably lead to a reduction in his net wage
rate, and as is known, the worker's income is
determined according to the hours of work that the
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worker puts in and according to his preferences
between working hours and rest hours, and thus he
will choose the optimal combination of working hours
and rest hours at the appropriate prevailing cash wage
level. This decision depends on the form of the
preference pattern and, more precisely, on the
marginal benefit of income and the marginal benefit of
rest, noting that the loss in a certain aspect must be
compensated for in the other aspect so that the worker
is in a good position, and this is what the classical
theory of work confirmed.
Accordingly, the normal labor supply curve responds
directly to the increase in wages. The effect of the tax
on working and rest hours is not clear due to the
substitution effect. Some may prefer rest hours instead
of working hours when wages decrease, and others
may work more hours than before to compensate for
the losses caused to them by taxes. Therefore, it can
be said that the substitution effect and income will
work in a way that is contrary to taxes (Al-Rawi: 1999:
33).
If the labor supply curve is elastic (a direct relationship
between wages and labor supply, and according to the
classical theory, reducing wages due to the imposition
of a tax will lead to a reduction in the quantity of labor
offered due to the emergence of the substitution
effect, i.e. replacing work hours with rest hours), but if
the labor supply curve is abnormal (an inverse
relationship between wages and labor supply), which
is what the modern theory of labor suggests, then
reducing wages resulting from the tax will encourage
individuals to work more hours than before to
compensate for the losses they incurred as a result of
imposing the tax on them, and here the income effect
appears (replacing work hours with rest hours)
(Guartini: 1984: 34). In this regard, we point out that
the ability of any individual to work depends on a
number of factors, including biological, social and
psychological factors that are linked together to form
the ability to work, and perhaps the income factor is
the only factor that determines this ability through its
impact on the physical, health and psychological skills
of the worker, and inspires him to work, and therefore
the design of a tax based on income should not target
the working class of society because it is basically low-
income and imposing a tax on it will lead to a reduction
Its level to more than before and thus its ability to work
will be lost in addition to the humanitarian
considerations that must be taken into account.
The impact of taxes on consumption and savings:
To clarify the impact of taxes on consumption and
savings, it is necessary to identify the factors that
determine each of them. Consumption is affected by
several factors, including income, tastes, consumer
preferences, population size, prices of alternative and
complementary goods, and consumer expectations.
Income is considered one of the most important of
these factors as it is the main determinant of individual
consumption. As for the rest of the factors, their impact
is less than the income factor (Samuelson: 1999: 321).
As for savings, it is that part of income that is not
directed towards consumption. It will also be affected
by the size of the individual's disposable income and the
marginal propensity to consume. Keynesian theory
assumed that income is distributed between
consumption and savings. Therefore, everything that
affects the size of income will show its effect on savings
and consumption, negatively or positively, due to their
relationship, i.e. (saving and consumption), in a direct
relationship with income (Edgeman: 1984: 112).
Both direct and indirect taxes negatively affect
individuals’ income. Indirect taxes imposed on goods
and services raise the prices of these goods and services,
which in turn reduces demand for them by individuals
and reduces their real incomes as a result of their
reduced consumption of goods and services due to their
high prices.The impact of indirect taxes on commodity
prices depends on the type of goods and the elasticity
of demand for them. Essential goods that are
characterized by having a low elastic demand have
prices that are more affected by the tax than other
goods that have a high elastic demand (Al-Janabi: 1991:
57). As for direct taxes, their impact will inevitably lead
to a reduction in individual disposable income, which
will show its impact on reducing the volume of
consumption and savings for individuals because they
are directly related to individual income. The impact of
direct taxes on the volume of savings depends on the
nature of the technical organization of the tax and the
income categories or brackets that constitute the tax
base. If income taxes are of the type of proportional
taxes, the volume of total savings will be affected in a
small and imperceptible way because proportional
taxes affect the rich and the poor alike and their impact
is relatively small on the rich class that is characterized
by a high marginal propensity to save. If direct taxes are
of the progressive type, their impact on reducing savings
will be significant because they will cut off a large
portion of the income of the rich that may be allocated
to saving, but this decrease in saving can be
compensated by increasing the income of low-income
individuals through the income redistribution policy, of
which progressive direct taxes are one of the most
important tools (HEIJDRA, BEN. 2012: 25
Modern theories in fiscal policy: In the same context, a
school called the supply-side school emerged in the
early eighties, and its pioneers were (George Sheldor
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and Akritol). This school criticized the Keynesian
financial ideas that remained dominant in economic
activity until the mid-seventies. The owners of this
school believe that Keynesian theory always
emphasized the aggregate demand side and neglected
the aggregate supply side, as the pioneers of this
school believe that the best way to improve economic
performance is to focus on increasing the aggregate
supply of goods and services, as well as reducing high
tax rates because of their significant impact on
investment decisions, labor supply, and savings.
Supply-side economists believe that high marginal tax
rates reduce Savings and increases consumption and
limits the incentive to invest. (Kazem: 2016: 73) and
thus reduces economic growth rates in addition to
decreasing tax revenues. Therefore, supply-side
economists demand reducing marginal tax rates to
encourage workers to increase labor supply,
encourage investors, increase productivity, and raise
growth levels, thus increasing tax revenues. One of the
analytical tools used by supply-side economists to
support and support their opinions is the graphic curve
developed by economist Arthur Laffer, which
illustrates the relationship between tax rates and the
total tax revenues received by the state.
The researcher concluded that there is a wide debate
about the concept of fiscal policy among economic
schools, and according to the classical school, fiscal
policy should be a neutral fiscal policy that guarantees
private property rights based primarily on Adam
Smith's ideas of non-government intervention in the
market.
The Keynesian school dealt with the concept of fiscal
policy and the importance of the government's
interventionist role, which according to their vision is
the source of strength and economic success and
ensuring the future, and that the government should
have a decisive and effective role in market
mechanisms to ensure economic stability, which was
set as the first goal of fiscal policy by Keynes.
Monetarists believe that increasing public spending
should be financed in a way other than borrowing from
citizens, but rather through the issuance of new
currency or increasing taxes. If it is financed through
the issuance of new currency, it will inevitably lead,
according to the opinion of monetarists, to a significant
increase in the volume of production without
displacing private capital.
If the central bank follows an expansionary monetary
policy by purchasing government bonds from the
market, thus increasing the amount of money in
circulation and maintaining the stability of the interest
rate, the same is the case if private investment is not
flexible with respect to the interest rate, then the
increase in the interest rate resulting from the
expansionary fiscal policy will not greatly affect the
volume of private investment.
RECOMMENDATIONS
The researcher recommends the following:
The increase in the interest rate will lead to a decrease
in the volume of private investment, and thus the
budget deficit policy based on increasing public
spending and financed by loans as we mentioned
Note that the horizontal axis represents the tax rate and
the vertical axis shows the total revenues that the state
receives from taxes. The Laffer curve takes the shape of
an inverted U, as tax revenues increase with increasing
tax rates and reach their maximum at point (M) and
then begin to decline with increasing tax rates. This
supports the ideas of supply-side economists. When the
tax rate is zero, the total revenues will also be zero. The
same applies if the tax rate is (100%), as the total
revenues will also be zero because individuals refrain
from engaging in investment activities because they are
unprofitable. The best tax rate is at (50%), as the total
government revenues reach their highest level at point
(M). After this tax rate, tax revenues begin to decline,
considering that high tax rates will reduce the supply of
labor, savings and investment and push taxpayers to
evade or avoid taxes. Supply-side economists have
come up with changes to the structure of the tax system
called supply-side tax cuts, improving incentives by
lowering marginal tax rates, making the tax system less
progressive, and designing it to encourage productivity
and stimulate aggregate supply rather than relying on
aggregate demand.
1- It will lead to the emergence of the crowding-out
effect and the displacement of private investment from
economic activity to be replaced by public investment.
2- Following Keynesian mechanisms in the event of a
financial deficit in the general budget chapters by
reducing public spending to the lowest levels to reach
the desired state of economic stability.
The point of view of the money-makers is one of the
most important achievements, which is the lack of
overlap between the monetary authority and the
government by giving the full role to the central bank to
exercise its role correctly, since most government
interventions had negative and destructive effects on
the economy, including excessive issuance of currency
to cover the deficit in the general budget, which leads
the economy to a state of economic insta.
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