Taxes_and_the_Punishment_Due

Taxes and the Punishment Due Samuel Brogdon Economic 100 Instructor Brent Beyer August 22, 2011 Taxes and the Punishment Due Taxes seem to be one of the most talked about things among people in America. People are always complaining that taxes are too high, taxes are unfair, I hate paying taxes, and Uncle Sam always gets his are just a few familiar cries. In reality taxes play a very important role in the economy. Taxes can affect peoples’ net income, taxes also affect the Gross Domestic Product (GDP), and taxes also affect a wide variety of other things in the economy in various ways. The government controls taxes, but does the government raise taxes on everyone to redistribute wealth and income among citizens' Taxes and their effect are a major economical factor in all of our lives, and their effect goes much farther than just our weekly paycheck. Taxes and net income, two words that are usually spoken of with hatred for one another, can have a little effect or a drastic effect on a person’s net income; if taxes are low people will pay fewer taxes, this leads to a higher net income and more disposable income per person. However, there is a downside to having taxes low. If taxes are too low for too long of a period the government would not be able to finance itself. This would mean a large loss of many government programs. Road construction and maintenance would slow drastically, many welfare programs would lose funding, and we could lose many public services like policemen or firemen. On the reverse side of the equation higher reduce a person’s net income. Reduced net income gives way to less disposable income less disposable income leads to less spending by consumers. Just like too low taxes for too long of a period, too having taxes too high for too long of a period of time can also have dire effects on peoples’ everyday lives. When taxes are increased the productivity of people seems to decrease because they make less money per hour labored (Congressional Budget Office, 2005). People tend to spend less because they have less money to spend. People spending less leads to higher supply and lower demand which in turn leads to a higher unemployment rate which drops demand and lowers peoples’ net incomes even further. The Gross Domestic Product or GDP is a measure of all the goods and services produced in a country for a given amount of time, typically a year. Taxes and GDP seem like two completely separate issues, but in truth, taxes can also affect the GDP in a positive or a negative way. I have found that many economists cannot agree if lower taxes or higher taxes negatively or positively affect GDP. It is my personal belief that lower tax rates have a positive effect on the GDP because businesses can pass on the savings of lower taxes to the consumers, thus increasing demand and raising profits and production. This increase in profits and demand lead to a higher GDP in two ways. First corporations report higher earnings and with increased demand are able to increase production. Second the government itself is able to collect more tax from these corporations and their employees through the larger amount of workforce needed to increase production, and possibly from higher wages given to employees in lieu of higher profits. This can lead to overall higher consumer spending and faster economic growth, which greatly increases the GDP. A 10% tax cut in corporate tax alone can sour GDP growth of 1.1% (Lee and Gordon, 2005). In theory we can say that too high of a tax rate would decrease GDP because corporations would pass these new higher tax rates on to consumers. Higher costs to consumers would lead to a lower demand for the product, lower product demands generally lead to a higher supply and eventually surpluses. These Surpluses would in turn lower production and GDP reducing unemployment (Dutta, 2006). Taxes can affect many other things besides net income and Gross domestic product. Taxes can affect government spending, unemployment rates, investing, and even consumer prices. Government spending is always an issue in today’s economy. The government runs off of tax money amongst other sources of income. To raise taxes as mentioned earlier could have one of two impacts on government spending. If the tax rate is too high many entrepreneurs and corporation’s see no need to expand. This not only affects unemployment rates, but also the government’s tax income. With the government receiving less income one of two things will occur, either government will have to spend less by cutting back its spending on government programs and budgets for various other things, or the national deficit will begin to grow even bigger (Romer & Romer, 2008). A bigger deficit leads to a higher tax burden later, which can lead to even more government programs being cut off or receiving much smaller budgets. Tax rates also have a definite impact on unemployment rates. As I just mentioned higher tax rates can put a damper on business investing. This means that large corporations and entrepreneurs alike see no incentive to either expand or start new business. Little to no business growth leads to a higher unemployment rate. Also higher taxes can force businesses to burden their consumers with higher costs, the end result being less demand for products and less demand for labor thus increasing the unemployment rate even farther. However lower tax rates, especially on corporations, can lead to economic growth and help to lower unemployment rates. Lower tax rates also help to increase consumer spending and raise the demand for consumer products. This increased spending can help to cause reluctant lenders to loan money for new businesses and business expansions; this alone helps the economy in more than one way. New business ventures lead to higher tax income despite the lower tax rate there are more facets to collect taxes from. This increased tax income can spur new government programs and help to fund older government programs more efficiently. The government does raise taxes to redistribute wealth evenly. This is the reasoning behind marginal tax brackets. The wealthy, businesses and corporations, and middle class Americans share a heavier tax burden than those who have lower incomes. There are several problems that exist in this system and the middle class does seem to carry more than its fair share of the tax burden. The wealthiest class of Americans only has to provide a small percentage of their net wealth as realized income, therefore they can enjoy a lighter tax burden than those less fortunate middle class Americans who report their entire income (McCaffery, 2002). Even though this seems unfair the tax system was built to have wealthier people to pay more tax as they can afford it. Businesses and corporations, and their shareholders, also share a heavy tax burden. This is due to the large amount of revenue generated by businesses. The lower class citizens of America usually face lower income taxes than the rest of America, not to mention that thanks to some new government programs like the per child tax on the Taxpayer Relief Act of 1997. This act was introduced to relieve poverty among lower income taxpayers and even offered a negative income tax available to some families (United States Department of Treasury, 2003). Taxes are one of the most talked about economic issues in America. Taxes are indeed one of the most politically charged arguments that are available for debate. Taxes can affect net incomes in a positive or a very negative way. The Gross Domestic Product is affected by taxes, but taxes should not be raised or lowered based solely off of the gross domestic product. Taxes affect a variety of things, not just how big your paycheck is, and in an economic sense taxes were actually designed to distribute wealth evenly, but the tax system, like any other government system, is flawed. Taxes may be worth complaining over, but in the end everyone has to pay the tax collector. References Congressional Budget Office. (2005). Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates. Retrieved August 15,2011 from http://www.cbo.gov/ftpdocs/69xx/doc6908/12-01-10PercentTaxCut.pdf Dutta,S. (2006). Introductory Economics (Micro and Macro) For Class XII. New Age International. Daryaga, Delhi, In Lee, Y & Gordon, R. (2005) Tax structure and economic growth. Published in Journal of Public Economics, Volume 89 Issue 5-6, June 2005, Pages 1027-1043 McCaffery, E. (2004). Fair Not Flat : How to Make the Tax System Better and Simpler. University of Chicago Press. Chicago, Il Romer, C. & Romer, D. (2008). Do tax cuts starve the beast' Retrieved August 17,2011 From http://elsa.berkeley.edu/~cromer/draft708.pdf United States Department of Treasury (2003). History of the US tax System. Retrieved August 16, 2011 from http://www.policyalmanac.org/economic/archive/tax_history.shtml