Understanding The Economics Of Taxation

Whether it is in ancient Egypt or in modern America, the effect of widespread taxation has always been felt by the people living in these countries. The economics of taxation seeks to explain the effects of various tax measures on the economy of any nation.

For you to understand the economic impact that taxes will have on an economy, you need to look at it as the forced transfer of wealth from individuals and corporate organizations to the government. It is the government which then determines how these resources will be allocated, mainly for the good of the public.

The first thing that you need to look at when considering the economics of taxing persons is the redistribution of income. In many societies, income tax is progressive. This means that the more you earn, the higher will be the tax rate. The effect of this is that it helps to redistribute income from the rich to the poor. This is especially true if the poor are given benefits such as unemployment benefits.

The other economic impact of taxation is the reallocation of resources. It is quite hard if not impossible for citizens to come up and unanimously form an army that they will pay and then make contributions towards the same. However through taxation, a government can direct resources into areas which otherwise would not have received the required resources.

It also has the effect of discouraging savings. Since many systems usually tax the income that is received on a certain amount of time rather than the income that someone would receive in the entire lifetime, people tend to spend their money in the consumption of goods rather than saving the money for future investment.

In situations where taxation systems are not well developed, taxation can unintentionally discourage investment in certain areas or facilities. A good example is when one is faced with the choice of either running a company or running a partnership.

If one has a choice between starting a partnership. Now, these two entities might have the same roles except for the fact that one is a company and the other is not. Since companies are taxed as separate legal entities, they will have to pay taxes on the profits. Once the dividends are distributed, you will also need to pay taxes on your dividends. Now this may seem like double taxation and hence discourage those who would have invested in companies. On the other hand, other people may prefer to invest in a partnership because the income from partnership is just taxed once.

Despite all the negative impacts that taxation may have on an economy, there are positive impacts of taxation on the economy too. All in all, it is impossible to come up with a perfect system that will deal with all the negative aspects of taxation.

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