Tax Policies Essay
Taxes are financial charges or levies impose by a government on companies or individuals as a source of government revenue. Government needs revenues to cover their expenditure, which include enforcement of law and order, security, public works and infrastructures. The government also finances education and health care systems. Taxes are levied to transfer wealth from the richer people in society to the poor. They are also effective in addressing externalities. Generally taxes are used for distribution and allocation purposes. Taxes are beneficial for the economy. (Phillipe H and Norberg K, 1994)
Taxes designed to discourage harmful activities to the environment benefits the community as a whole. For instance taxes on harmful gas emissions act as incentives to reduce pollution, which can be disastrous to the health of individuals. Carbon dioxide and other greenhouse gases are responsible for global warming which has adverse effects to the whole world.
Tax policies can have short term or long-term effects to the economy. Taxes can reduce people’s incentives to work, save or invest. Taxes could be consumption taxes, income taxes and taxes on international borrowing. Other types of taxes include corporation taxes, estate and social security taxes. (Gupta A, 2002).
The wealthy people in society are subject to inheritance taxes and estate or gift taxes. Personal income taxes apply to taxes imposed on individuals or families while corporate taxes apply to corporate earnings. Proportional taxes ensure equitable distribution of resources in the economy. Taxes benefit the community through the services the government is able to provide from revenues earned through taxes. (Gupta A, 2002). The community attains health and education.
Increasing tax rates acts as a disincentive for laborers. On the other hand, if tax rates are lower, people will be motivated to work and their productivity levels will be higher. Taxes can encourage or discourage production of certain goods. (Gupta A, 2002). To encourage the production or consumption the government imposes higher taxes on the goods in question. On the contrary taxes are deducted to promote the production and consumption of preferred goods. Therefore taxes affect the production of goods and services and therefore influence people’s consumption patterns.
An increased income tax reduces people’s disposable incomes making them ‘poorer’ as their purchasing power is reduced. Taxes on producers of goods and services translate to higher prices for them as the said producers transfer the costs to their consumers. People tend to avoid goods that are costly. (Phillipe H and Norberg K, 1994)
Again, they can substitute the expensive or costly goods thus promoting the reduced disposable substitutes. This is referred to as the substitution effect of taxes. With reduced disposable incomes individuals are forced to operate on constrained budgets and their consumption trends will be affected. This is the income effect of taxes. (Gupta A, 2002).
Taxes regulate or restrict certain types of business practices, products or services. Income, sales and property taxes are revenue taxes while excise and import duties are regulatory taxes. Taxation is a very important source of government revenue. Other sources of government revenue include borrowing and charging for services. Payroll taxes benefits the community as they are used to finance social insurance programs like social security. The elderly unemployed and the disabled benefit from these taxes. Consumption taxes are levied on sales of goods and services. Taxes imposed on cigarettes and alcoholic beverages are excise taxes.
Taxes affect people’s saving power or ability. When taxes are levied on interests or dividends they reduce the benefits that would have been felt if saving was done. Taxes can therefore influence a people’s saving ability. Taxes can influence the physical investment for businesses when tax rates put in place are higher in certain places than in others.
Businesses will locate their premises where tax rates are lower so as to increase their profitability levels. Taxes are added costs for the business. Reduction of people’s purchasing power reduces their ability to obtain necessities, comforts and luxuries. (Gupta A, 2002). If the tax burden falls on the poor they are likely to feel a strong impact. Their standards of living will be lowered and thus their efficiency and ability to work will be reduced.
The rich in society may not feel the impact as taxation. Taxation for them mostly affects luxurious goods, which don’t influence their efficiency or ability to work. Tax policies affect people’s ability to save. Incomes determine the amount of savings. Reducing people’s incomes automatically reduces their saving power. The richer people have higher marginal propensity to save, as their incomes are higher than their expenditures. Taxes on the poor greatly reduce their ability to save. Ability to save affects investment and capital formation in the economy. Effects of income on distribution affect income generation as well as income distribution. The tax rates and the type of tax influence the effects to be felt. Governments must incorporate effective taxation policies that promote equity and growth in the economy.
Alka Gupta. 2002. Public Finance and Tax Planning. Anmol Publications PVT.
Hoffman Phillipe and Kathryn Norberg. 1994. Fiscal Crises, Liberty, and Representative Government, 1450-1789, p. 238.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 21 April 2017
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