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Business Deals, Economy and The Tax

by Daniel Pauly

From an empirical point of view, there is ample evidence that taxes on sumptuous goods (of the highest luxury) are bad for the worker. Contrary to what most believe, when the government levies extremely high-end products, the rich are not paid, but the worker who is employed in this trade. Similarly, studies have shown that taxes on labor (however paradoxical it may seem) are more effective in promoting long-term economic growth than taxes on capital.

Other Aspects

There is still a lot of other empirical and theoretical evidence on the best way to promote tax collection. But the strongest result of this literature is: do not use the tax burden to promote income distribution. Income distribution should be done through public spending, not taxation. There are also issues where studies do not have a definitive answer. For example, it is still an open question whether consumption taxes are more efficient than income taxes. For calculating the same, the use of the taxfyle.com/blog/best-tax-software is increasing.

The General Taxation Options

In general, the negative impacts of taxes on economic growth come from what economists call the “dead weight of taxes”. The “dead weight” is the loss of efficiency associated with a specific tax. Every time the government raises or creates taxes, a number of exchanges that were previously made in the economy are no longer made. This reduction in economic exchanges is precisely the deadweight of the tax. For example, suppose you agree to pay 10 dollar to wash your car. Suppose also that there is someone willing to wash your car for 7 dollar.

  • Therefore, you will have your car washed for a price between 7 and 10 dollar. In case the agreed price is 8 dollar, you had an increase of 2 dollar in your well-being (you would expect to pay 10 dollar and paid only 8 dollar). And the car washer would have an increase of 1 real in his wellbeing (he would like to wash the car for 7 real and received 8 real). That is, the welfare of society increased by 3 dollar. Suppose now that the government creates a tax of 4 dollar on each car washed. In this case, the previous exchange becomes impossible. Consequently, the welfare of society is reduced by 3 dollar. This reduction in society’s well-being resulting from the tax is what we call the dead weight of taxes.

The greater the dead weight of a tax, the greater the number of exchanges that will no longer be made in the economy, and the greater the negative impact of this tax on long-term economic growth. Some experts mistakenly say that the CPMF was a good tax.

What They State

They state this by saying that the CPMF collected a lot and had a low collection cost. From an economic point of view, the quality of a tax is measured by three factors: a) ease and cost of collection; b) amount collected; and c) dead weight associated with the tax. CPMF performed well on items “a” and “b”, but it is a disaster on the most important item, item “c”. The CPMF distorts financial transactions too much, with direct impacts on the economy’s interest rate. Thus, before we classify a tax as “good” it is essential that we check the distortions that it generates in the economy.