Economic Efficiency

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Taxes levied on goods and services always cause harm and distort the efficient operation of the economy and therefore should not be levied

Economic efficiency looks at how countries maximize economic resource use (John, 2007). The traditional economic resources include capital, land, and labor. The efficient operation of the economy is an issue of discussion among various economies. The post Keynesians believe on the discretionary policies, which advocate either the use of fiscal policies or monetary policies to control the economy. Nevertheless, the classical economists suggest that the economy should be left to operate by itself. This is the view presented in this proposition. I agree with this proposition that taxes have distorted the efficient operation of the economy. Taxes are fiscal policies and they are meant to affect consumptions of the citizen depending on the situation of a country’s economy.

To start with, taxes influence the demand of products and services in a particular economy. When tax on a product is increased that is Value Added Tax, the demand for that product is likely to decrease. The increase in tax may reduce the real income of an individual (John, 2007). It causes a decrease in the purchasing power of the consumer. Income tax also affects the disposable income of individuals. This reduction in income may force potential consumers to prepare a scale of preference in which some products may be given a preference if seen as essential as compared to other products. This is the same as in the case of giffen goods, where more investment may be made on the inferior necessity. No taxes means that the demand of products would be determined efficiently free of discretionary policies, which dictate the efficient operation of the economy.

The supply of products and services is also affected by taxes. The raw materials and other factors of production that facilitates production of goods and services are...