How Does Vat Increases Or Decreases Affect A Currency?
Tax cuts are typically positive for the currency and tax hikes are typically negative.
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We have a question here from Coleo asking how does changes to VAT or value added tax usually affect a currency? Thanks for the question.
So if we take a look at VAT or value added tax on this PDF. VAT basically falls into the fiscal policy side of the economy.
So generally, and the government will decide what levels of VAT are appropriate. And generally speaking, any increase in fiscal policy or additional spending in the economy like infrastructure plans or increasing military spending, et cetera, is usually a positive because it's real money being spent in the economy. And then there are other parts to fiscal policy as well, which can also be seen as either a positive or a negative. And that comes back to taxes.
Now you get various different types of taxes. VAT of course, value added tax is one of them. The main two ones that we normally look at to get a sense of the overall fiscal policy is as it relates back to income tax and corporate taxes.
Now, if you recall in the U.S. one of the main reasons why the U.S. had such a great end of 2016, 2017 and 2018, why they perform much better than any of the other major economies was due to that massive corporate tax cut, that was announced by the U.S. administration.
So generally tax cuts is a positive for the economy, because if it's personal income tax, for example, it means that spenders or consumers will have more cash in their pockets, and it will be able to stimulate the economy. And the majority of the economy will usually, or workers will usually spend that money, that additional money in the economy, in the real economy, when it comes to companies, of course, less taxes means more company profits and more profit should lead to more investment.
Now I say, should lead to, because obviously paying less in taxes can also give companies incentive to just do stock buybacks, which doesn't really benefit the larger or the real economy that much. But it is good for employment overall or should be at least in theory. And then vice versa, of course, tax increases are usually negative for the opposite reasons.
Now, when it comes to VAT or value added tax, it is usually seen as a positive when it's reduced for both consumers as well as companies, because that means that company goods will cost less and consumers can have, can basically buy more with their money and vice versa when VAT is increased, it is usually a negative for consumers as well as companies for the opposite reasons.
Now, there is a caveat to this as well, Coleo, obviously reducing VAT should be good for spending, it does however reduce your government's income, which can be a problem or seen as a problem for countries that are struggling with huge deficits.
So it might be bad for consumers and companies to increase it, but it might mean that the government makes a little bit more money. However, the debate about whether it is good or bad in the longterm has many caveats because on the one end, you can increase VAT to help the government raise more money.
But if you reduce it substantially you would arguably boost the economy a lot more. It might mean that the government might lose out on income of VAT taxes now in the short term, but in the longterm, it might actually foster more growth in the economy, which would foster more profit for companies, which would foster more jobs, meaning more income tax. So in the bigger scheme of things, a cut in VAT in the longterm can actually be more beneficial because it can actually allow consumers to grow and companies to grow, which in the end will benefit the government in terms of corporate taxes and income taxes.
And so there are a few caveats and with that, but generally speaking a reduction in the V-A-T or VAT would be seen as fiscal stimulus and should thus be positive for the currency. And an increase would be seen as a reduction in fiscal stimulus and should be negative, theoretically, for the currency. So hope that helps.
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There’s a link below were you can learn more about it
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We have a question here from Coleo asking how does changes to VAT or value added tax usually affect a currency? Thanks for the question.
So if we take a look at VAT or value added tax on this PDF. VAT basically falls into the fiscal policy side of the economy.
So generally, and the government will decide what levels of VAT are appropriate. And generally speaking, any increase in fiscal policy or additional spending in the economy like infrastructure plans or increasing military spending, et cetera, is usually a positive because it's real money being spent in the economy. And then there are other parts to fiscal policy as well, which can also be seen as either a positive or a negative. And that comes back to taxes.
Now you get various different types of taxes. VAT of course, value added tax is one of them. The main two ones that we normally look at to get a sense of the overall fiscal policy is as it relates back to income tax and corporate taxes.
Now, if you recall in the U.S. one of the main reasons why the U.S. had such a great end of 2016, 2017 and 2018, why they perform much better than any of the other major economies was due to that massive corporate tax cut, that was announced by the U.S. administration.
So generally tax cuts is a positive for the economy, because if it's personal income tax, for example, it means that spenders or consumers will have more cash in their pockets, and it will be able to stimulate the economy. And the majority of the economy will usually, or workers will usually spend that money, that additional money in the economy, in the real economy, when it comes to companies, of course, less taxes means more company profits and more profit should lead to more investment.
Now I say, should lead to, because obviously paying less in taxes can also give companies incentive to just do stock buybacks, which doesn't really benefit the larger or the real economy that much. But it is good for employment overall or should be at least in theory. And then vice versa, of course, tax increases are usually negative for the opposite reasons.
Now, when it comes to VAT or value added tax, it is usually seen as a positive when it's reduced for both consumers as well as companies, because that means that company goods will cost less and consumers can have, can basically buy more with their money and vice versa when VAT is increased, it is usually a negative for consumers as well as companies for the opposite reasons.
Now, there is a caveat to this as well, Coleo, obviously reducing VAT should be good for spending, it does however reduce your government's income, which can be a problem or seen as a problem for countries that are struggling with huge deficits.
So it might be bad for consumers and companies to increase it, but it might mean that the government makes a little bit more money. However, the debate about whether it is good or bad in the longterm has many caveats because on the one end, you can increase VAT to help the government raise more money.
But if you reduce it substantially you would arguably boost the economy a lot more. It might mean that the government might lose out on income of VAT taxes now in the short term, but in the longterm, it might actually foster more growth in the economy, which would foster more profit for companies, which would foster more jobs, meaning more income tax. So in the bigger scheme of things, a cut in VAT in the longterm can actually be more beneficial because it can actually allow consumers to grow and companies to grow, which in the end will benefit the government in terms of corporate taxes and income taxes.
And so there are a few caveats and with that, but generally speaking a reduction in the V-A-T or VAT would be seen as fiscal stimulus and should thus be positive for the currency. And an increase would be seen as a reduction in fiscal stimulus and should be negative, theoretically, for the currency. So hope that helps.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
