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Taxes and their effect on the economy

The process of determining the economy is dependent on either increasing taxes or reducing. Supporters of tax reduction urge that reducing would improve the economy through increasing the citizens' spending. However, people who reject tax reductions feels that reducing taxes could only benefit the rich since the government would run short of funding to offer services to low income people. Low-income people who depend on government services would suffer more when services offered by the government become extinct n and unavailable. The system of taxation depends on varying types of taxes available in revenue collection (Cloutier, 2010).

Study analyzed by The Internal Revenue Service indicates that tax amount up to 43 percent of the collected tax through income taxation. Tax paid is directly proportional to the amount of money earned by an individual. Tax collected from accounting (payroll tax) sums up to 40 percent of the total revenue collected. This is the money deducted from salaries and wages contributed by the employee together with the employer. Payroll tax has grown rapidly to become a reliable source of revenue collection for the federal government in the recent past. The other types of revenue include corporate tax and excise tax levied on sold items.

The burden shift tax fits best where it will cause least effect. Tax burden shift means shifting tax payment to other areas when the economic response to tax results to changes in prices and output. In the year 1991, the federal government committed a serious mistake of placing sales tax on luxury items in response to curb price changes of essential commodity (Cloutier, 2010). The effect was worse since the luxury item companies collapsed due to lack of reliable market and thus, a big number of people lost their jobs.

Federal taxes influence Gross National Product. This determines the wealth powers of a country. Gross National Product is equivalent to total export added to spending on investment plus purchases made by the government, plus individual consumption spending. Studies have indicated that consumer spending generate 67 percent of the gross national product (Cloutier, 2010). Reduction on taxes means that consumers will demand goods and services more, adding pressure to the limited supply. Elimination of supply tax influence formation of capital. When this happens the concentrated demand and supply raises the prices leading to a subsequent drop in the demand (Cloutier, 2010).

It is encouraging that properly calculated tax drop result to an economic growth. This was evident in1964 when congress passed an 18 percent drop with an aim of boosting economy (Kirkup, 2011). Reducing tax encourages consumer spending and self-reliance by improving the standards of living. In 1986, Ireland reduced the taxes, and as a result, Ireland is currently one of the countries with the highest standard of living.

Although there are two concepts of tax equity, taxing individual is sometimes a hard task. The two concepts are horizontal and vertical equity. Horizontal equity involves equally taxation to all individuals regardless to ones earnings. This concept is mostly applicable when purchasing goods where percentage of the sales tax is proportional to the value of the item purchased. Vertical equity, on the other hand, entails the paying of the taxes depending on one's ability. That means those with higher earnings should receive more taxes. A good example of this concept is the federal income tax system for individuals. Here, the income tax progresses as the individual income rises. Reduction of income taxes becomes a difficult task due to the taxes progressive nature. Reduction of taxes by 25 percent to families with a gross income, adjusted let say by $ 50,000 incomes, would save them an approximation of about $2,000. Families with an income of about $ 150,000, which is taxable, get, taxed a small amount, that is, 10 percent thus saving them about $ 3,300 (Cloutier, 2010). Those people who oppose paying taxes use progressive nature and imbalance of income taxes to evade paying taxes. Taxing becomes a benefit to the rich as compared to the poor fellows. For instance, cutting of taxes increases the disposable income and people taxed in dollars save more money. This means that people who go untaxed fail to earn any benefits from the cut.

Moreover, taxing becomes a difficult decision to make due to the budget balancing. Cutting of taxes reduces revenue to the government thereby creating a deficit while budgeting. Evading this problem is possible in a situation where the government reduces its spending rates. Though cutting of taxes increases the disposable income, there are arguments that this becomes beneficial to the rich. In general terms, this boosts consumer spending increasing the economic growth hence benefiting both the rich and the poor.

In the United States, the Republicans and the Democrats are on negotiations on whether debt limit will contribute to increase in revenue and deficit reductions (Bartlett, 2011). Republicans feels that increase in taxes would lead to economy depression. To the republicans, tax increment and cuts spending has a downward effect on the economy; the same case applies on reduction of cumulative demand. Therefore, fiscal contraction on taxes and spending have a depressing effect on the economy although it depends on how taxes increase or cut on spending. This may be due to low income; therefore, resulting to growth depression. In addition, subsidies given by the government affects it is budget decision-making and reduces economic growth far much below the free market would reduce growth. According to Bartlett (2011), higher taxation usually boosts the economy (Bartlett, 2011). Leadership of a nation contributes slow growth of the economy. When a nation spends wisely, economy grows, and this enhances better service delivery to its citizens.

According to economists, reduction on taxes is the same as spending referred to as the tax expenditure. On the other hand, reducing tax expenditure is the same as reducing budget on subsidies. With this, the republicans were still against the abolishment of tax expenditure if induced cut affect to other taxes since they argue that an increase in net tax would lead to growth depression. In 1982, Ronald Reagan believed that the financial deficit was a stern obstacle to economy growth and that an increase in tax would be cost-effectively favorable. Many people in his party rejected this move claiming that this was a research done by Republican economists (Bartlett, 2011).

In the same year, Richard Lesser, president to the US Chamber of Commerce sent an analysis to the Congress on proposed Tax increment. In the analyzed letter, Richard felt that this would affect the economic recovery. In addition, it would affect cash flow since businesses get over taxed causing depression in the stock market. This would also reduce inducements on savings, which improves creation of jobs and production. Moreover, this would mean increase in prices on goods and services, and increase in government spending since the economy get depressed and the nation cannot find employment opportunities to its citizens. This means that it would be difficult to forecast growth on economy. In 1983, Gross Domestic Product recorded a 4.5 percent growth and the stock market had significant improvements. In 1984, a higher rate of 7.2 percent emerged. In 1983 and 1984, rate of inflation remained steady, rate of unemployment reduced from 10.6 percent to 8.1 percent in December 1983 and 7.1 percent in the following year (Bartlett, 2011).

Although there no adequate evidence to support analysis, many people believe that taxes collected affect financial decisions. The rate of government taxation affects the citizens of leisure and labor. They also have an impact on the behavior of the labor market and the activities undertaken. These activities denote regular or underground sector jobs. This determines how the income tax and working systems affect the choice of working hours in the underground sector. When inflation increases the nominal incomes, the personal income tax structure raises the tax rates. The tax rates are equitable as a property of real tax by fixing it in the consumer prices. In the economy, the equilibrium steady state influences the rate of inflation (Bartlett, 2011). Changes in the rate of inflation affect capital intensity of the economy leading to a subsequent change in the ratio of the debt-equity and output of debt and equity.

In Britain, on June 2011, the International Monetary Fund told George Osborne to support the reduction in the deficit by cutting down public spending. According to the global economic analysts, economy remained steady with interest rates remaining low while inflation indicated signs of going down in 2012 (Kirkup, 2011). International Monetary fund also warned Britain of economic risks where growth will be frail and high rates of unemployment. The government should counter these economic risks by stimulating the economy through easing quantitatively from Bank of England and through cutting of taxes to benefit businesses and low-income earners.

Tax returns have an effect to the economy since cutting taxes lowers the burden of taxation.

A non-profit organization called National Tax Payers Union advocates for tax cuts and small government (Hall, 2011). In 2010, report indicated that most of the American businesses and households spend most of the time and money. This was in an attempt to comply with tax return forms and requirements of federal tax where these processes take long hours to be completed (Hall, 2011). The report also reveals that paperwork associated with complying with these requirements costs America an approximate of eight billion hours meaning that the whole processes depresses the American economy. Fiscal policy, which deals with government spending and taxation, may slowdown or quicken the economic growth. For instance, monetary and fiscal policies affect the US economy. For a substantial economic growth, monetary policies must regulate the supply and circulation of money in the market (Hall, 2011).

Historically, prior to the Great Depression, government did not have to take action on economy performance as anticipated. According to the policy makers, governments should act on economy stabilization through heavy taxation (University of Liverpool, 2011). Changes in taxation policies affect individual spending in that increase in taxation to workers means that their salaries will decrease, in turn, their spending power becomes less. This has an overall effect to businesses since they do not make much profit and they tend to cut down on operations. This affects the economy in a downward trend. In addition, adjustments in taxation policies have effect on businesses. In conclusion, increase in taxation to businesses results to low profits hence they tend to slow down in expansion and may lay down some of their employees. The resulting effect is that due to jobs lost, individuals' starts spending less, therefore, both businesses and individuals spend less affecting the economy. When the government decides on reducing taxes, the reverse will be true.


Bartlett, B. (2011). Will Higher Taxes Tank the Economy? Retrieved from: http://www.thefiscaltimes.com/Columns/2011/06/24/Will-Higher-Taxes-Tank-the-Economy.aspx

Cloutier, R. (2010). Do Tax Cuts Stimulate The Economy? Retrieved from: http://www.investopedia.com/articles/07/tax_cuts.asp#axzz1SjKelXBy

Hall, S. (2011).Tax returns and how they affect the economy. Retrieved from: http://www.ehow.com/about_6399530_tax-returns-affect-economy.html

Kirkup, J. (2011). Cut taxes to boost economy, IMF tells George Osborne .Retrieved from: http://www.telegraph.co.uk/finance/economics/8560490/Cut-taxes-to-boost-economy-IMF-tells-George-Osborne.html

University of Liverpool. (2011). How Do Taxes Impact Our Economy? Retrieved from: http://www.ehow.com/about_6388580_do-taxes-impact-economy_.html