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Joey Plazo and Andrea Trent Analyze Tax Implication on Emerging Nations at the Kuala Lumpur Business Summit

Among the most often discussed issues in economics is how tax rates relate to economic growth. Promoters of tax cuts assert that a reduction in the tax rate will lead to increased economic growth and prosperity. Others maintain that if we all reduce taxes, almost all of the benefits will proceed to the affluent, as those are the ones who pay the most taxes. What exactly does economic theory indicate regarding the connection between economic growth and taxation?

Income Taxes and Excessive Instances

In examining economic policies, Joseph Plazo claims thatit is consistently useful to analyze excessive instances. Extraordinary 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 wholly unrealistic, they do give very bare examples of what focus crucial economic variants will move when we alter a government policy.

Joseph and Andrea speculate that a postulate. Suppose that we lived in a society without taxation. We are going to worry about the way the government finances its plans later on, but for now we'll suppose they have ample money to fund all of the programs we've today. In case there are no taxes, then the authorities doesn't bring in any income from taxation and citizens don't spend any time worrying about how to evade taxes. If someone has a wage of $10.00 an hour, they get to keep that $10.00. If this type of society were possible, we could observe that folks would be somewhat productive as any income they get, they keep.

Now consider the opposing case. Taxes are actually set to be 100% of income. Any cent you get goes to the authorities. It may seem the authorities would earn lots of cash this way, but that's not likely to happen. If I don't get to keep anything out of what I get, why would I go to work? I'd rather spend my time reading or playing baseball. Actually, going to work would risk my ability to survive. I'd be much better off spending my time trying to think of methods to get the things I desire without giving them to the government. I'd spend a great deal of my time trying to grow food in a hidden garden and bartering with others for the things I must survive. 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 quite productive if everybody spent a sizable part of their time looking to evade taxes. The government would bring in very little income from tax, as very few individuals would go to work if they did not make an income from it.

While these are extraordinary cases, they do exemplify the effect of taxes and they are useful guides of what happens at other tax rates. A 99% tax rate is horribly like a 100% tax rate, and if you ignore set prices, having a 2% tax rate is not much different from having no taxes whatsoever. Return to the individual getting $10.00 an hour. Can you think he'll spend more time at the office or less if his take home pay is $8.00 rather than $2.00? I'd bet you that at $2.00 heisn't likely to spend plenty of time at work and he is going to spend a lot of time trying to make a living from the prying eyes of authorities.

Taxes as well as Other Ways of Funding Government

In the case where government can fund spending outside tax, Joseph Plazo and Andrea Trent see the following:

Productivity declines as the tax rate increases, as individuals 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 action. So the lower the tax rate, the higher the worth of all the goods and services created.

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%, but they will not get more at 100% than they will at 10%, because of the disincentives high tax rates cause. Consequently there's a peak tax rate where government revenue is highest. The connection between income tax rates and government revenue could be graphed on something called a Laffer Curve.

Clearly, government systems are not self-funding.

This leads to the problem on tax cuts. Are tax cuts as bad as Capitalists like to exhort?

A tax cut does not necessarily help or damage an economy. You need to consider what the revenue from those taxes is being spent on before you'll be able to discover the result the cut will have to the market. Out of this discussion, however, we see the next general tendencies:

Cutting taxes and wasteful spending can help an market because of the disincentive effect due to taxation. Cutting taxes and beneficial plans may or may not benefit the economy.

A certain amount of government spending is necessary on the military, law enforcement, along with the court system. A state which doesn't spend an acceptable amount of money in these types of areas will obtain a blue market. A lot of spending in these places is wasteful.

A country also wants infrastructure to truly have a high amount of financial action. A lot of the infrastructure cannot be adequately supplied by the private sector, so authorities must spend cash in this area to make sure economic growth. Nevertheless too much spending, or spending in the incorrect infrastructure might be wasteful and slow economic growth.

If people are naturally inclined to spend their particular money on education and health care, afterward taxation used for social programs probably will slow economic growth. Societal spending which targets low income families is much better for the economy than worldwide plans.

If people aren't inclined to spend towards their particular instruction and health care, then there can be a gain to suppling these goods, as society as a whole gains from a healthier and knowledgeable workforce.

Before I get an inbox filled with hate mail, I'm not proposing that the government end all societal programs. There may be many benefits to these programs that aren't measured in economic growth. A slowdown of economic growth is likely to happen as these plans are enlarged, nevertheless, so that should often be considered. If the program has enough other advantages, society as a whole may want to have lower economic growth in return for further social plans.

True this article oversimplified some crucial problems. However that's typically required in a first look for an economic problem. I plan on dealing with many of these particular issues in more depth as time goes on. I'd love to hear your take to the matter and everything you'd like to see covered in more depth later on

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


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