Taxes

The Effect of Taxes on the Economy

Tiara Newman

ECO100

Samila Amanyroufpoor

December 12, 2011

There has been much debate over the effects of taxes on the economy. There are advocates that believe that tax cuts and tax increases are a vital part of society that has allowed the nation to exist as long as it has. Along with the advocates, are the ones who believe that raising and lowering taxes causes more harm than good. The key is finding a balance between the two sides and figuring out what type of economic push society needs to increase economic growth. This paper will investigate the impact and effect that changes in the level of taxation has on the economy.

A tax is a financial charge imposed on an individual or legal property by the state or government. It is not considered voluntary, but is enforced by the authority that the government utilizes. The government uses these taxes to fund public services, provide the income for government officials, fund military and foreign aid, and to influence the economic performance of society. Many of the government programs, such as unemployment, Social Security, and Medicare/Medicaid are all funded and dependent upon the implementation of taxes. There are four main purposes of taxation. Those purposes are revenue, redistribution, repricing, and representation. Revenue is the largest and main purpose of taxation. The money that is brought in is used to pay for schools, hospitals, and state roads and highways. Even though revenue may be the main purpose of taxation, it is not certainly not the only one. Redistribution is considered to be the transfer of wealth from the higher end of society to the lower end and poorer sections of society. This is heavily debatable and remains a controversial part of taxation to this day. When taxes are used to address externalities, such as tobacco and alcohol, it is a form of preventive measure known as repricing. For example, this has...