How does fiscal policy use taxation?

Fiscal policy employs taxation primarily as a tool for redistribution of income and to fund government services. Through taxation, governments can collect revenue that is then utilized to provide essential services like education, healthcare, infrastructure, and social welfare programs. This approach helps redistribute wealth within the economy, as those with higher incomes typically contribute a larger share through progressive tax systems. The funds raised through taxation enable the government to invest in public goods and services that benefit society as a whole and can address economic inequalities.

Utilizing taxation in this manner enhances social equity and can stimulate economic activity by providing resources for public investment. The structure and level of taxation can influence the distribution of income and wealth, ultimately shaping the overall economic environment. Therefore, the focus of fiscal policy on taxation as a means to redistribute income and fund essential services is a fundamental aspect of how governments seek to manage and support their economies effectively.