Net taxes refer to the amount left of tax revenue after adjusting for payment transfers. It is equal to government tax revenues minus transfer payments.
Calculating net taxes
Tax revenue is positively correlated with aggregate income or economic growth. In other words, it increases during economic expansion and decreases during contraction. When the economy expands, economic activity increases. We will see healthy business profits and increased household income. Taxpayers also increase because many people are working, and many companies are profitable.
Net taxes = Tax revenue – Transfer payments
Meanwhile, some transfer payments do not involve the exchange of goods and services, for example, unemployment benefits. It contrasts with other expenditures such as current expenditures and capital expenditures.
Since there is no exchange, in the GDP component of the expenditure approach, unemployment benefits are excluded from the government expenditure component.
Unemployment benefits have a negative correlation with economic growth. Its amount increase during a recession as the unemployment rate rises. Conversely, during an economic expansion, the amount decreases as the unemployment rate falls.
When spending exceeds net tax, the government has a fiscal deficit. To finance this deficit, the government borrows from the financial market or from the external sector.
Conversely, when the government runs a fiscal surplus, the expenditure is lower than the net tax. The remaining money (savings) is loaned out in the financial markets.