Governments get the greatest percentage of their income from taxes paid by tax payers in any given country. Taxation is a policy whereby citizens or residents of a country contribute money for social services to the government through well coordinated guidelines. Different countries have different taxation laws.
Taxation is a way through which resources are distributed from the haves to the have-nots. During campaigns of 2008, Senator John McCain’s promised to reduce taxes as a way of reviving the economy; but the question is how the economy will grow if the government has no money? No one likes paying taxes; however it is an evil that we have to live (Anon, 2009). People, if asked, would opt to pay the lowest taxes ever but surprisingly enough they will demand more services from the government.
The notion that was set that taxes should be reduced is welcomed by many citizens; they are of the opinion that it will have a direct benefit on them since disposable income will increase (Klieth, David & Lawrence, 2008). This is true; however there are dangers that will accompany the move. This paper will discuss how tax cuts can revive an economy.
Different countries adopt different taxation policies, however tax cut take the same route; it can result from raising the minimum amount that is taxable in an economy, reducing the percentage of taxation or even eliminating the entire amount of taxes. Some countries offer tax credits and remission to areas that they would like to give this percentage. There are some cuts which are meant to cut across the entire economy and some are on a specific industry.
Whichever the method, the end result is a reduced tax payable from the trader, individual or company. Governments play an important role in controlling how their country’s economy fair. In a broader perspective, they use monetary and fiscal policies for contraction or expansion reasons. When regulations are made, they may hurt or benefit the economy in short term and long term. Tax cut is an expansionary fiscal policy adopted with the aim of reviving an economy.
There has been three times that tax cuts have been implemented by the government to facilitate economic growth, in all the phases there has been success. In 1920’s, there was the Harding/Coolidge cuts, then in 1960’s there was president Kennedy cuts, and the Reagan cuts of the 1980s. All the three cuts have proved to be successful. They have followed the same trends that facilitated revival of economies by ensuring that people are given a reason to invest and spend in their economy. Let’s analyze how they manage to revive the economy;
Increased disposable income
Income tax is tax that is charged on individuals and companies out of the money that they get in a certain period of time. In United States of America taxation laws, individuals use a graduated scale of taxation. This is a case where there is set percentages payable depending on the income that one gets.
It ensures that those people who earn higher pay more taxes. When it comes to taxes, it is a standard percentage, unless a particular company is enjoying a certain benefit. Before the taxable value is reached, there are some allowable and disallowable which are adjusted in the profit.
In cases of a tax cut, then the people will have more funds to use, their disposable income will increase. Disposable income increase means an increased consumption. In the recession period, consumption in the economy leads to an aggregate demand of goods and services.
Spending will induce money in the economy, which in turn will affect the economy positively (Newlyn, 1985). If expenditure is facilitated, then chances of recovery are higher. Businesses on the other hand will have adequate resources for business expenditure (in terms of investments).
In all economies personal consumption expenditures, account for the largest amount of government revenue; thus when facilitated it is likely to lead to a quicker recovery from recession (Hall & Lieberman, 2008).
Local Investments and Foreign Direct Investments
One of the hindrances of foreign investments is high taxation taxes especially if the company is a foreign company. If tax rates are reduced, then investors will be attracted by the favorable tax t-rates and invest in the economy. Investments increase the rate of a country development, there is an increased employment, a larger tax net is created and increased consumer choices. When more companies invest in a particular economy, competition is created and this gives rise to efficient ways of doing business.
Local investors are also to benefit from tax cuts since they will feel attracted to invest in their own economy since the tax they are paying is manageable. The overall will be an economy that can meet its own demands in terms of employment, products and services. Local investors will prefer their country instead of another one which might be offering tax incentives.
Globalization and International Trade
The world is undergoing an era of globalization where different countries are involved in trade among each other. As economies expand and trade with each other with assistance of improved technology, the world is becoming a global village. Economies are joining efforts to develop an economic, political or/and social block as they prepare to play a role in the global environment.
Globalization is a process of integration of regional economies and cultures into a global network of trade. In most cases the term globalization is used in economic terms; however it extends to social aspects of life. When trading, a country with a comparative advantage is likely to dominate the market since it is able to produce more goods at relatively low prices.
When calculating the cost of production, there are fixed cost and variable costs. This will set the price that the commodity will be sold whether in the national or international market. Taxation is a cost that is included in a product. When tax rates are reduced, then the cost of these products are reduced; they can then compete more favorable than the same good from countries which has no tax cuts.
When goods are competitive in international market, it means that there will be more countries willing to trade with the country with tax cuts. This leads to an increase in foreign taxes. China has overtaken Japan to be second largest economy as a result of cheap products found in the economy. The same benefit that China has gotten can accrue to any other country (Brownlee, 1996).
Reduced Government Control of Trade
Government use taxation money to finance its projects; if the finances are reduced, then priority areas will be undertaken first. One of the areas that are likely to suffer is government participation in businesses directly. This is likely to come in terms of privatization as they fetch for money to finance deficit created by reduced taxes or it may be through not involving in trade. When it sells public companies to individuals, then there is a facilitated competition.
Monopolistic control will be reduced and thus efficiency is created in an economy. This will give rise to an improved economy. When the government fails to invest in the economy, it creates room for private investors to invest in the economy. This offers more opportunities for investment; an economy that creates room for investment is likely to improve. When private sector is left alone without much government involvement, then they are likely to be competitive and develop better ways of doing things.
For example, one of the area that a government is expected to assist is in provision of medical services to its population. If this service is not freely available, private practitioners will invest in the area. They will develop better ways of doing business, better medicines brought about by competitiveness.
In an economy investment is facilitated by the amount of savings that the economy can make, if people can make more saving then there will be an increase in saving. When taxes are reduced, there is an amount that that can be aced for investment purposes. An economy grows when there are investments.
Investments = savings
I = S.
Companies pay a large amount of money as taxes, in United States the rate ranges from 25% to 30%; if this amount is left to the control of the businesses they are likely to boost additional investments and expansions. These expansions create other avenues of taxation and improved living standards.
When people are paying less taxes on the amount of revenue that they are earning, they will be motivated to work harder and in the process the economy improves. Business will be willing to undertake research in virgin areas since they are aware that the benefits will accrue to them in the short and long term (Spencer Heath MacCallum, 2007-09-12).
Increase ethical businesses and corporate social responsibilities
Modern methods of business have necessitated the urge to respect the needs of a customer. This is why companies are involving in corporate social responsibilities and are ensuring that their businesses are conducted ethically. If the government eases the burden of tax, it is a psychological approach that may motivate companies to participate in more corporate responsibilities.
Cost of goods
Taxation is a cost that is added when determining the cost of a product. If taxes are reduced then there will be a reduction in the cost of commodities. Cheap products in an economy mean that there is a more choice and satisfaction to the customers since they can afford these products. The poor in the society will be accommodated since they can afford products in the economy and thus reduces inequality gap. Businesses are also able to sell products at low prices and still earn a higher profit.
The government requires revenue to finance its projects; government projects are meant for the benefit of the public. If there is a reduction in level of taxes, then the government will get a reduced amount of revenue and will limit the amount of projects that it can finance.
The most important thing in a tax cut process is to ensure that there are mechanisms in the economy that can “repay” the amount of taxes lost. These projects involve increasing the tax net. A wider tax net with a low rate of tax will ensure a growing economy where there will be increased revenue without hurting the population.
Taxation is a policy whereby citizens or residents of a country contribute money for social services to the government through a well coordinated taxation policy. Different countries have different taxation laws. Taxation is a way that resources are distributed from those who have to those who don’t. +A tax cut is a measure undertaken by governments to reduce the amount of tax payable from a taxpayer.
It may be general to all members of an economy or it may be specific to a certain industry. Whichever the case it affects an economy. In the 20th century, there has been three tax cuts in United States of America; Harding/Coolidge cuts, then in 1960’s there was President Kennedy
Cuts, and the Reagan cuts of the 1980s all of which were successful. Their success is brought about by the benefits of tax cuts; they include reduced Cost of goods, increased ethical businesses and corporate social responsibilities, increased savings and investments, Reduced government control of trade, it facilitates Globalization and international trade, it encourages Local Investments and Foreign direct investments, and increased disposable income tax payers.
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Brownlee, W. (1996). Federal Taxation in America: A Short History. Washington, DC: Woodrow Wilson Center Press.
Klieth, A., David B. and Lawrence B. (2008). The financial crisis and rescue. What went wrong? Why? What lesson can be learnt? Toronto: university of Toronto press.
Newlyn, W. (1985). Fiscal and Monetary Policies and Problems in Developing Countries (Book). Journal of Development Studies, 21(2), 298. Retrieved from Academic Search Complete database
Spencer Heath MacCallum (2007-09-12). “The Rule of Law Without the State” Ludwig Von Mises Institute. Retrieved October 5, 2010 from http://www.mises.org/story/2701.