Atty. Joseph Plazo and Andrea Trent Study Tax Implication on Growing Nations at the Kuala Lumpur Business Summit

14/04/2014 11:47

Some of the most often discussed issues in economics is how tax rates relate to economic growth. Supporters of tax cuts promise that a decrease in the tax rate will lead to increased economic growth and prosperity. Others claim that if we all reduce taxes, virtually all of the benefits will visit the wealthy, as those would be the people who pay the most taxes. What exactly does economic theory imply concerning the association between economic growth and taxation?

Income Taxes and Excessive Cases

In examining economic policies, Joseph Plazo claims thatit is always beneficial to examine excessive instances. Extraordinary cases are situations such as "What if we had a 100% income tax rate?", or "What if we increased the minimum wage to $50.00 an hour?". While completely unrealistic, they do give quite bare examples of what focus vital economic variables will transfer when we alter a government policy.

Joseph and Andrea speculate that the postulate. Suppose that we lived in a society without tax. We'll worry about the way in which the government finances its programs later on, but for now we'll suppose they have adequate cash to fund most of the programs we have nowadays. In case there are no taxes, then the authorities doesn't earn any income from tax and citizens do not spend any time worrying about the best way to evade taxes. If someone has a wage of $10.00 an hour, then they really get to keep that $10.00. If this type of society were possible, we could observe that people would be quite productive as any income they earn, they keep.

Now think about the opposing instance. Taxes are actually set to be 100% of income. Any cent you get goes to the government. It may appear the government would bring in a lot of money this method, but that's not likely to happen. If I don't get to keep anything out of what I earn, why would I go to work? I'd rather spend my time reading or playing baseball. In fact, going to work would risk my skill to endure. I'd be a lot better off spending my time attempting to come up with ways to get the things I need without granting them to the authorities. I'd spend a lot of my time looking to grow food in a hidden garden and bartering with others for the things I have to endure. I'dn't spend any time working to get a business if I did not get anything from it. Society as a whole would not be that productive if everybody spent a sizable portion of their time trying to evade taxes. The authorities would get very little income from tax, as very few individuals would go to work if they did not get an income from it.

While all these are extraordinary instances, they do exemplify the consequence of taxes plus they are useful guides of what goes on at other tax rates. A 99% tax rate is really just like a 100% tax rate, and should you dismiss collection costs, having a 2% tax rate is not much different from having no taxes at all. Go back to the person bring in $10.00 an hour. Can you think he'll spend more time at work or less if his take home pay is $8.00 rather than $2.00? I'd bet you that at $2.00 heisn't planning to spend plenty of time on the job and he is going to spend a lot of time attempting to earn a living from the prying eyes of government.

Taxes as well as Other Ways of Funding Authorities

In the instance where government can finance spending outside taxation, Joseph Plazo and Andrea Trent see the following:

Productivity fall as the tax rate increases, as individuals choose to work less. The more complicated the tax rate, the more time people spend evading taxes and the less time they spend on more productive task. So the lower the tax rate, the more complex the worth of all goods and services made.
Authorities tax revenue doesn't necessarily increase as the tax rate increases. The government will get more tax income at 1% rate than at 0%, however they will not bring in more at 100% than they'll at 10%, as a result of disincentives high tax rates cause. Therefore there's a peak tax rate where government revenue is greatest. The relationship between income tax rates and government revenue could be graphed on something called a Laffer Curve.
Clearly, government systems aren't self-financing.

This leads to the issue on tax cuts. Are tax cuts as lousy as Capitalists like to exhort?

A tax cut does not absolutely help or hurt an market. You need to consider exactly what the revenue from those taxes is being spent on before it is possible to ascertain the effect the reduction will have about the market. From this discussion, though, we see the next general tendencies:

Cutting taxes and wasteful spending may help an economy because of the disincentive effect caused by taxation. Cutting taxes and useful programs might or might not help the economy.
A certain quantity of government spending is required in the military, the police, along with the court system. A state which doesn't spend an acceptable amount of cash in these regions will get a miserable economy. Too much spending in these places is wasteful.

A state also needs infrastructure to have a high level of financial activity. Much of this infrastructure cannot be adequately supplied by the private sector, so authorities must spend cash in this area to ensure economic growth. However too much spending, or spending on the incorrect infrastructure might be wasteful and slow economic growth.

If people are naturally inclined to spend their particular cash on education and health care, subsequently taxation used for social systems will probably impede economic growth. Societal spending which targets low income families is much better for the market than universal programs.

If people are not inclined to spend towards their own instruction and health care, then there could be a advantage to suppling these goods, as society as a whole gains from a healthier and well-informed workforce.
Before I get an inbox filled with hate mail, I am not proposing the government end all social programs. There can be several advantages to these programs which are not quantified in economic growth. A slow down of economic growth is likely to occur as these programs are expanded, yet, so that should continually be taken into account. If the plan has plenty of other benefits, society as a whole may want to have lower economic growth in return for further social programs.

True this post oversimplified some crucial issues. However that's generally crucial in a first look for an economic problem. I anticipate dealing with some of those specific issues in more depth later on. I'd want to hear your take in the problem and that which you'd like to see covered in more depth later on

Joseph Plazo is an entrepreneur and attorney from the Ateneo De Manila University. He provides pro bono consulting to local government and SMEs. Andrea Trent serves as a finance adviser at the ADB and delivers bookkeeping supervision at the WHO.