Economic Impact of Taxes
Taxes, as Oliver Wendell Holmes once said, are the price of civil society. Governments collect taxes to raise armies, provide police and fire protection, operate school systems, pave streets and fund other government services. Lawmakers can levy taxes, but cannot legislate their economic outcomes, which are determined by the type of tax, the distribution of its burden and the forces of supply and demand.
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Types
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The main types of taxes include income taxes, levied on a person's salary or wages, and consumption taxes, levied on consumer spending. These include sales taxes, used by many U.S. states, and the value-added tax, or VAT, widely used in Europe. Other types of taxes include property taxes and corporate income taxes.
Identification
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Taxes distort market outcomes, affecting the buying and selling of goods and services. A tax on a good, for example, raises the price of the product, making it more expensive to purchase. However, if consumers buy less, forcing the market price down, then the tax affects sellers, who receive a lower price for their products. Whether buyers or sellers bear the greatest share of a tax burden is based in part on the concepts of supply and demand, and elasticity. The latter refers to responsiveness to price changes.
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Theories/Speculation
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Mainstream economic theory holds that the most inelastic side of a market (supply or demand) will bear the greatest share of the tax burden. The demand for cigarettes, for example, is likely to be somewhat inelastic because of their habit-forming nature. A tax on cigarettes, then, will likely be borne mostly by smokers themselves, who may not alter their smoking habits a great deal.
Effects
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Taxes distort the prices that buyers pay and sellers receive for their goods, as demonstrated in the previous section. Taxes also affect incentives to work, earn and invest. An income tax affects decisions to work and invest because of the issue of marginal tax rates, the extra tax on additional income. For example, suppose a tax rate of 20 percent applies to all income up to $50,000 a year. Any income over $50,000 a year is taxed at a rate of 40 percent. A person earning $50,000 a year would pay $10,000 in taxes; however, if that person earns an additional $10,000 ($60,000 a year total), that additional $10,000 would be taxed at 40 percent, or $4,000.
The corporate income tax, while politically popular, ultimately affects workers and the public at large. A higher corporate tax rate may discourage companies from investing more, expanding their businesses and creating jobs. In addition, the higher tax is often passed on to the consumer in the form of higher prices.
Considerations
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Sometimes a tax will have a far different impact than what was intended by government policy makers, as the so-called "luxury tax" illustrates. In 1990, Congress levied a luxury tax on such items as yachts, private jets and furs. Because only the wealthy can afford such luxuries, the tax seemed like a way to tax the wealthy. Demand for these goods, however, turned out to be highly elastic. Instead of buying yachts or private planes, millionaires could go on cruises, fly first class, buy a mansion or save their money. As a consequence, the burden of the luxury tax fell on the makers of luxury items. Congress repealed the tax in 1993.
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Comments
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quite helpful
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Nice :))
