Fiscal Neutrality

The idea that a tax should not distort economic behaviour. For example, income tax may influence the number of hours a worker is willing to work. This is an example of a tax that influences people’s behaviour.

On the other hand, a poll tax (a lump sum on each adult per year) is non-distortionary because it won’t affect economic choices.

This is also known as an efficient tax because it doesn’t distort economic behaviour.

However, a good tax is concerned to address several other features such as:

  • Fair and redistribute income
  • Influence demand for demerit goods

Because of issues of equity, lump sum (poll tax) type taxes are rarely used. The Conservative government did introduce the poll tax, but popular resistance led to it being abolished.

Neutral Fiscal Stance

A neutral fiscal stance could refer to the influence on AD. If the stance is neural the government is neither trying to boost AD (reflationary fiscal policy) or reduce AD (deflationary fiscal policy)


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