Final answer:
Selecting a fiscal year that ends during a low point in the operating cycle can potentially reduce tax liability, aligning with periods of lower income and inventory levels. However, this must be balanced with legal and ethical accounting practices. Government fiscal policies to address economic fluctuations can lead to increased budget deficits and national debt, while Arthur Laffer's theory suggests that sometimes lowering tax rates can result in increased tax revenue.
Step-by-step explanation:
It is favorable to select a fiscal year that ends when the operating cycle is at its lowest point for several reasons. During lower activity periods, businesses may have reduced inventory levels and outstanding receivables, which can lead to reporting lower income before tax considerations. This could potentially lower the tax burden for that fiscal year since taxes are calculated based on the income reported. However, this strategy should be used carefully to ensure it aligns with legal accounting practices and fiscal policies.
When the government utilizes fiscal policy tools, such as lowering taxes or increasing government spending to manage economic recessions, it affects the government's fiscal health. A reduction in tax revenue and an increase in spending can lead to higher budget deficits and an increase in national debt. These fiscal actions are taken with the aim to stimulate economic growth, but the trade-off can be long-term financial consequences for the government.
Regarding the relationship between tax rates and tax revenue, economist Arthur Laffer pointed out the concept that sometimes when tax rates are decreased, tax revenue can actually increase. Known as the Laffer Curve, this concept argues that lower tax rates can stimulate economic activity to the point where the tax base grows enough to compensate for the lower rates, resulting in higher overall tax revenue.