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Taxes are a necessary part of life. While they give most of us headaches and drain our monetary resources, we also enjoy many of the benefits of taxation. The money collected from taxes is used for many different functions. Everything from maintaining our roads and public buildings to the funding of our law enforcement, emergency services, and health care systems come from taxes. The distribution of taxes as well as the collection of them causes many arguments and different points of view. In this paper we will discuss some of the questions raised about taxation.
What happens to net personal income when the government raises taxes
When the government raises taxes and your gross income stays the same then usually your net personal income will decrease. As net personal income decreases then so does disposable income. This means people spend less and decreases the income of businesses they buy goods and services from, which can lead to a decrease in total tax revenue.
When the government lowers taxes
When the government lowers taxes people feel more comfortable about spending their money. This is because they know that their dollars will go farther and buy more goods and services than before the tax cut. Lower taxes along with controlled government spending has an immediate and positive effect on the economy. People spending more money will stimulate the economy and create more jobs. So, when the government lowers taxes it has a positive effect on personal income and encourages spending.
How is the GDP affected by higher taxes and lower taxes
In general, when the government brings in more in taxes than it spends, it reduces disposable income and slows the growth of the economy. So, the fiscal policy prescription to stabilize an overheated economy is higher taxes.
In times of inflation??”when too much demand is bidding up prices??”a tax increase, coupled with no increase in government spending, will dampen the upward pressure on prices. The tax increase lowers demand by lowering disposable income. As long as that reduction in consumer demand is not offset by an increase in government demand, total demand decreases.
A decrease in taxes has the opposite effect on income, demand, and GDP. It will boost all three, which is why people cry out for a tax cut when the economy is sluggish. When the government decreases taxes, disposable income increases. That translates to higher demand (spending) and increased production (GDP). So, the fiscal policy prescription for a sluggish economy and high unemployment is lower taxes (2003, Gorman).
What other economic factors are affected when taxes are raised or lowered, and how are they affected
So much is affected when taxes are raised. When taxes go up people spend less money because the dollar no longer buys as much as it used to. This creates a chain of events that effects everyone. When people spend less businesses are effected because they sell less. Businesses will compensate by cutting jobs, cutting back on the products that they supply, and some busnesses have to file bankruptcy. The loss in jobs and income will cause the poverty rate to increase. With the poverty rate increasing and unemployment rising we will see an increase in forclosures, evictions, homelessness, and even the crime rate. When taxes are lowered then opposite is usually true. So, when some time goes by with high taxation and excess government spending then the government will lower taxes in an effort to boost consumer spending and avoid a recession.
Should the government increase tax rates on everyone as a way to equalize incomes and wealth
While it does seem like the have nots far outnumber the haves here in America, the truth is that if the government were to do anything to equalize incomes or redistribute wealth could cause even more problems.
Incomes may not be equal, but neither is the tax burden. Consider this: In 2007, the last year for which IRS data is available, the top 1% of incomes in the country, with a minimum of $400,000 in AGI, paid 40% of all personal income tax. And the top 5% paid more than the other 95%.
You might think this is fair, and maybe it is. However, if higher taxes on the top income earners are enacted, it will spawn a different problem.
The fact is the majority of Americans currently barely feel the burden of income tax, as 40% of Americans pay no income tax at all. Having a populace that thinks everything Congress spends money on is not their problem is damaging to democracy. People are likely to support any new expenditure, knowing it wont burden them. That support feeds even more spending from caviling politicians looking for popular measures (Schram, 2009).
I can really see both sides of the argument. I understand why the wealthy thinks it is unfair to pay a higher tax rate than others. It seems the fair thing to do would be to tax everyone the same. However, it seems if we did that then the rich would just get richer and the poor would indeed get poorer. And it seems finding middle ground is almost impossible. But this is how our system works. And many people believe it is how it should work. Without argument and compromise we would never move forward. Some also believe without inequality of wealth people would not push themselves to work towards a better life. I can also see how this would be true.
???Inequality of wealth and incomes is an essential feature of the market economy. It is the implement that makes the consumers supreme in giving them the power to force all those engaged in production to comply with their orders. It forces all those engaged in production to the utmost exertion in the service of the consumers. It makes competition work. He who best serves the consumers profits most and accumulates riches???.
Ludwig von Mises
In closing I do not think that there will ever be a clear cut answer to the problems we face with taxation. However, I do believe the market system we have in this country is one of the best in the world, and with compromise, will continue to improve.