Despite taxes being one of the topmost funding to most governments, there are some economic effects of taxation that in one way or another affect certain variables in an economy. An economy can be affected either positively or negatively. Some of the effects of taxation include:
7 Economic effects of Taxation
Effects of taxation in production
Production is inversely related to taxation. The ability of any government to lower the amount of tax to a given cooperation will automatically lead to a decrease in the cost of production which will be coupled by an increase in the cooperate revenue and vice versa. Taxation may have an effect on the ability of an individual to save, work and invest. Firstly, an individual will to work save and invest may be tampered with. This may adversely affect the allocation of resources.
Effects on the will of people to work
Taxation may lower or increase the ability of people to work. If all your earned amount in a given year fall largely into the taxable bracket, then you may be discouraged to work as you will see that all your tax is being siphoned by the government. Again, you may be encouraged to work hard to so that to earn more cash even after taxation. Therefore it all banks to the government to set an excellent tax scale that will tax individual based on the amount earned.
Effects on saving
Savings can be seen as the difference between your earnings and expenses. Taxes fall into the expenses category. A high tax levied by the government may reduce the amount to save. A lower tax by the government will increase the amount to save.
Effects on Investment
Investment is a function of savings. The lesser the amount to save, the lesser the amount to invest too. For an economy to perform efficiently, investment should be the topmost priority by most of this government. Thus most governments set the affordable tax rate to encourage both local and foreign investor to invest.
Effect of taxation on income distribution
The distribution of both income and wealth depends on the tax rate set by the given government. A progressive tax is a tax in which the tax rate increases from low to high, by examining that the taxpayer’s average tax rate is less than the person’s marginal tax rate. The progressive tax system is seen to take funds from the rich individuals and the amount earned used to fund activities that have an impact on the lives of the poor. A regressive tax system will automatically increase income inequality.
Effects on the allocation of resources
Taxation can limit both the size and pattern of production in a given economy. Taxation on harmful commodities may ultimately discourage the consumption and production of this resources (Citrus Paribus). This may divert resources set on production of this resources to other sectors.
Effects of taxation on the price of commodities
The higher the rate of taxation, the higher the prices of commodities and vice versa. Taxation is seen to reduce or increase the cost of production which may trigger a fall or rise in prices of commodities keeping all other factors constant.