Joey Plazo and Andrea Trent Keynote Taxation Implication on Medium Nations at the Kuala Lumpur Business Summit
One of the most often discussed issues in economics is how tax rates relate to economic growth. Advocates of tax cuts maintain that a decline in the tax rate will lead to increased economic growth and prosperity. Others assert that if we reduce taxes, nearly all of the advantages will proceed to the rich, as those would be the people who pay the most taxes. What does economic theory suggest concerning the connection between economic growth and tax?
Income Taxes and Extraordinary Cases
In examining economic policies, Joseph Plazo claims thatit is consistently helpful to study extraordinary cases. Excessive instances 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 very blunt examples of what direction vital economic variants will move when we shift a government policy.
Joseph and Andrea speculate that a postulate. Suppose that we lived in a society without tax. We'll worry about how the government finances its programs later on, but for now we'll assume that they have adequate cash to fund most of the plans we've nowadays. In case there are no taxes, then the authorities doesn't earn any income from taxation and citizens do not spend any time worrying about how you can evade taxes. If someone has a wage of $10.00 an hour, then they get to keep that $10.00. If this type of society were potential, we could see that people would be quite productive as any income they earn, they keep.
Now look at the opposing case. Taxes are now set to be 100% of income. Any cent you bring in goes to the authorities. It might seem that the government would get 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 bring in, why would I go to work? I'd rather spend my time reading or playing baseball. In fact, going to work would risk my power to survive. I'd be much better off spending my time trying to think of means to get the things I want without giving 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 must 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 part of their time attempting to evade taxes. The government would bring in hardly any income from taxation, as very few people would head to work if they didn't earn an income from it.
While these are extraordinary instances, they do illustrate the result of taxes and they're useful guides of what goes on at other tax rates. A 99% tax rate is very just like a 100% tax rate, and if you ignore set costs, having a 2% tax rate is not much different from having no taxes whatsoever. Go back to the person getting $10.00 an hour. Would you believe he'll spend more time on the job or less if his take home pay is $8.00 rather than $2.00? I'd bet you that at $2.00 he's not planning to spend plenty of time at work and he's going to spend a lot of time looking to make a living from the prying eyes of authorities.
Taxes along with Other means of Funding Authorities
In the instance where authorities can fund spending outside of taxation, Joseph Plazo and Andrea Trent see the following:
Productivity drop as the tax rate increases, as folks decide to work less. The more complicated the tax rate, the more time individuals spend evading taxes as well as the less time they spend on more productive activity. So the lower the tax rate, the higher the value of all goods and services made.
Government tax revenue doesn't necessarily improve as the tax rate increases. The government will make more tax income at 1% rate than at 0%, however they will not earn more at 100% than they will at 10%, as a result of disincentives high tax rates cause. Thus there's a peak tax rate where government revenue is greatest. The connection between income tax rates and government revenue could be graphed on something called a Laffer Curve.
Obviously, government programs are not self-funding.
This results in the problem 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 have to consider what the revenue from those taxes is being spent on before you're able to ascertain the effect the cut will have to the market. From this discussion, however, we see the next general trends:
Cutting taxes and wasteful spending may help an economy because of the disincentive effect caused by tax. Cutting taxes and beneficial programs might or might not help the economy.
A certain sum of government spending is needed in the military, the police, as well as the court system. A country which doesn't spend an acceptable amount of cash in these types of areas will obtain a miserable economy. A lot of spending in these places is wasteful.
A country also needs infrastructure to have a high degree of economic activity. Substantially of this infrastructure cannot be sufficiently provided by the private sector, so governments must spend money in this area to ensure economic growth. Nevertheless too much spending, or spending in the incorrect infrastructure could be wasteful and slow economic growth.
If folks are naturally inclined to spend their own money on schooling and health care, subsequently taxation employed for social programs is likely to impede economic growth. Social spending which targets low income families is much better for the market than universal programs.
If people are not inclined to pay towards their own education and health care, then there could be a gain to suppling these goods, as society as a whole gains from a healthy and educated workforce.
Before I get an inbox full of hate mail, I'm not suggesting that the authorities stop all social programs. There may be many benefits to these programs that are not quantified in economic growth. A slow down of economic growth will probably occur as these programs are enlarged, however, so that should continually be considered. When the plan has plenty of other benefits, society as a whole may wish to have lower economic growth in return for further social plans.
True this article oversimplified some essential issues. However that is generally essential in a first look for an economic problem. I intend on coping with some of those specific problems in more depth in the near future. I'd want to hear your take on the matter and everything youwant to see covered in more depth as time goes on
Joseph Plazo is an entrepreneur and lawyer in the Ateneo De Manila University. He provides pro bono consulting to local government and SMEs. Andrea Trent functions as a finance adviser at the ADB and delivers accounting supervision at the WHO.
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