Atty. Joseph Plazo and Andrea Trent Study Tax Implication on Growing Economies at the Kuala Lumpur Business Summit

Among the most commonly discussed issues in economics is how tax rates relate to economic growth. Advocates of tax cuts claim a decrease in the tax rate will result in increased economic growth and prosperity. Others maintain that if we reduce taxes, almost all the gains will go to the wealthy, as those would be the ones who pay the most taxes. What does economic theory indicate regarding the association between economic growth and tax?

Income Taxes and Extraordinary Instances

In analyzing economic policies, Joseph Plazo maintains thatit is always useful to study extreme instances. Extraordinary instances are scenarios like "What if we had a 100% income tax rate?", or "What if we raised the minimum wage to $50.00 an hour?". While completely unrealistic, they do give very stark examples of what direction essential 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 the way in which the government fund its plans later on, but for now we'll suppose that they have enough money to fund most of the programs we've today. In case there are no taxes, then the government doesn't make any income from tax and citizens don't 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 such a society were potential, we can see that folks would be quite productive as any income they earn, they keep.

Now contemplate the opposing instance. Taxes are now set to be 100% of income. Any cent you make goes to the authorities. It might seem that the authorities would bring in a lot of cash this method, but that's probably not going to occur. If I do not 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. Actually, going to work would risk my ability to survive. I'd be much better off spending my time trying to come up with strategies to get the things I want without granting 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 need to survive. I'dn't spend any time working for a business if I did not get anything from it. Society as a whole would not be that productive if everybody spent a big part of the time looking to evade taxes. The government would make almost no income from tax, as very few folks would head to work if they did not get an income from it.

While all these are extreme instances, they do exemplify the effect of taxes and they're useful guides of what happens at other tax rates. A 99% tax rate is extremely just like a 100% tax rate, and should you blow off group prices, having a 2% tax rate isn't much different from having no taxes whatsoever. Return to the person bring in $10.00 an hour. Can you believe he will spend more time at work or less if his take home pay is $8.00 rather than $2.00? I'd wager you that at $2.00 heisn't going to spend plenty of time at work and he's going to spend a lot of time wanting to make a living from the prying eyes of authorities.

Taxes as well as Other means of Funding Authorities

In the instance where authorities can fund spending outside of tax, Joseph Plazo and Andrea Trent see the following:

Productivity decrease as the tax rate increases, as folks decide to work less. The higher 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 more complex the value of all the goods and services created.
Government tax revenue does not necessarily improve as the tax rate increases. The government will make more tax income at 1% rate than at 0%, however they will not get more at 100% than they'll at 10%, because of the disincentives high tax rates cause. So there's a peak tax rate where government revenue is greatest. The association between income tax rates and government revenue can be graphed on something called a Laffer Curve.
Obviously, government systems aren't self-financing.

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

A tax cut does not necessarily help or hurt an economy. You have to consider what the revenue from those taxes will be spent on before you're able to ascertain the effect the cut will have on the economy. Out of this discussion, however, we see the next general trends:

Cutting taxes and wasteful spending may help an economy due to the disincentive effect caused by tax. Cutting taxes and useful programs may or may not benefit the economy.
A specific sum of government spending is required on the military, law enforcement, as well as the court system. A nation which doesn't spend an acceptable quantity of money in these places will obtain a blue economy. A lot of spending in these types of regions is wasteful.

A state also wants infrastructure to really have a high amount of economic action. Much of the infrastructure cannot be adequately given by the private sector, so governments must spend cash in this area to ensure economic growth. Nevertheless too much spending, or spending on the incorrect infrastructure could be wasteful and slow economic growth.

If folks are naturally inclined to spend their particular money on schooling and health care, subsequently tax used for social systems is likely to impede economic growth. Societal spending which targets low income families is much better for the market than worldwide programs.

If folks aren't inclined to pay towards their own education and health care, then there can be a gain to suppling these goods, as society as a whole benefits from a healthy and knowledgeable work force.
Before I get an inbox full of hate mail, I am not proposing that the government stop all social plans. There may be many benefits to these plans which are not quantified in economic growth. A slow down of economic growth will probably occur as these programs are expanded, yet, so that should continually be taken into account. If the program has enough other benefits, society as a whole may want to have lower economic growth in return for further social plans.

Admittedly this post oversimplified some essential dilemmas. However that is usually crucial in a first look at an economic problem. I plan on dealing with some of those particular issues in more depth later on. I'd love to listen to your take in the matter and everything youwant to see covered in more depth later 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 works as a finance consultant in the ADB and delivers bookkeeping supervision at the WHO.

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