TAXES

Taxes

Taxes

Introduction

According to various researches, taxes have a significant impact upon the economic growth of state. Most of them advocate the negative impacts of taxes on economic performance of a state. On the contrary, few theories isolated taxes from economic growth, but analyzing economic growth under the context of high marginal income taxes rate concludes to decrease investment in the long run.

Discussion

Higher economic growth attracts foreign investments in countries. High investment promotes more employment opportunities in the country. Therefore, it is important to understand the relationship between economic growth and rate of taxation. There is a fine explanation of this negative relation in various economic theories. Increase in taxes cost lower the rate of return on investments. Firms and individuals minimize the tax burden through engaging in businesses which are less productive leading to lower economic growth. Moreover, government expenditure is positively co related with economic growth and development. Concept of tax pricing suggests a negative relationship with investments. Others school of thought is in favor of breading tax basis. According to them high tax increases government revenues. Tax deduction gives incentive to the tax payers in the form of reduction in tarries and credits. Such exemptions come under the bracket of government expenditure for legal and state regulatory bodies. Thus, tax free markets are more suitable for investments. Such markets attack more foreign direct investments which are major contributors of Gross Domestic Products of the country.

Economic Impacts of Taxes

Taxes perform the function of transferring wealth from the household sector to state governments. Economic theories are striving to know methodologies by which economic welfare is maximized with the use of taxation. Taxes may reduce economic welfare though vain labors or by high economic incentives by governments. Reduction in the economic welfare is due to the following reasons:

Cost of compliance.

Decrease in production.

Deadweight cost of taxation.

Preserve incentives.

Cost of Compliance

Tax compliance is those activities which are resultant of tax structure. These are cost particularly for maintaining records of tax payment by businesses. In order to maintain proper tax records, companies are required to inherit certain amount from their revenue. This amount is known as the cost of compliance. Government should help companies in reducing this cost for elevating economic welfare by simplifying tax processes in general.

Decrease in Production

Economic efficiency is tends to fall when there is a barter in division of labor. This means that paying tax on those services which are not performed by individual but outsourced. This can create an extensive gap between skilled labor and unskilled labor. Therefore, economic efficiency had an adverse impact due to such attempts.

Deadweight Costs of Taxation

Competitive market prices are bound for price adjustments due to the market drivers. Therefore, with tax interventions, there is a reduction in economic efficiency which causes deadweight loss. Taxes are bound to create an extra burden on seller since serve market competition does not allow the seller to shift the tax burden on the seller. This reduces level of transactions which have ultimate impact on the economic ...