how taxes affect economy on the long run



Taxation  is play a very important role in the management of every economy and must be designed in a way that everyone contributed to the national development
To ensure the  economy productive and sustainable, is to expand trade and to create jobs to all citizens. Consultation with  various stakeholders  need proper reviews to ensure tha the new regime when implemented would reflect the country economic management priority.

Economic activity reflects a balance between what people, businesses, and governments want to buy and what they want to sell. In the short run, demand factors loom large. In the long run, though, supply plays the primary role in determining economic potential. Our productive capacity depends on the size and skills of the workforce; the amount and quality of machines, buildings, vehicles, computers, and other physical capital that workers use; and the stock of knowledge and ideas.

Incentives
By influencing incentives, taxes can affect each of these factors. Reducing marginal tax rates on wages and salaries, for example, can induce people to work more. Expanding the earned income tax credit can bring more low-skilled workers into the labor force. Lower marginal tax rates on the returns to assets (such as interest, dividends, and capital gains) can encourage saving. Reducing marginal tax rates on business income can cause some companies to invest domestically rather than abroad. Tax breaks for research can encourage the creation of new ideas that spill over to help the broader economy. And so on.
Note, however, that tax reductions can also have negative supply effects. If a cut increases workers’ after-tax income, some may choose to work less and take more leisure. This “income effect” pushes against the “substitution effect,” in which lower tax rates at the margin increase the financial reward of working.
Tax provisions can also distort how investment capital is deployed. Our current tax system, for example, favors housing over other types of investment. That differential likely induces overinvestment in housing and reduces economic output and social welfare.

Budget effects
Tax cuts can also slow long-run economic growth by increasing budget deficits. When the economy is operating near potential, government borrowing is financed by diverting some capital that would have gone into private investment or by borrowing from foreign investors. Government borrowing thus either crowds out private investment, reducing future productive capacity relative to what it could have been, or reduces how much of the future income from that investment goes to US residents. Either way, deficits can reduce future well-being.
The long-run effects of tax policies thus depend not only on their incentive effects but on their budgetary effects. If Congress reduces marginal tax rates on individual incomes, for example, the long-run effects could be either positive or negative depending on whether the resulting impacts on saving and investment outweigh the potential drag from increased deficits.

Putting it together
That leaves open questions on how large these effects are, and how to model them for the purpose of analyzing policy changes. The Congressional Budget Office and the Joint Committee on Taxation each use multiple models that differ in assumptions about how forward-looking people are, how the United States connects to the global economy, how government borrowing affects private investment, and how businesses and individuals respond to tax changes. Models used in other government agencies, in think tanks, and in academia vary even more. The one area of consensus is that the most pro-growth policies are those that improve incentives to work, save, invest, and innovate without driving up long-run deficits.

The Tax Policy Center has partnered with the Wharton School of the University of Pennsylvania to analyze the long-run economic effects of tax proposals. The Penn-Wharton Budget Model is an overlapping-generations model in which simulated households make work and saving decisions to maximize their well-being subject to given government policies and economic conditions. TPC first used this model to estimate the economic and revenue effects of the tax proposals of Hillary Clinton and Donald Trump (Page 2016, Page and Smetters 2016).






Comments

Post a Comment

Popular posts from this blog

Innovation development in Financial Service Sector

Image
  The 2008 global financial crisis not only marked the end of the the benign credit environment, it also change the way corporate client and their bankers views transnational banking.Sound transnational banking practices like payment, receivable and reconciliation and trade risk instrument moves back to the center of corporate client business agenda increasing competition for better products offering         Visibility of information become critical as clients sought real time access to their global cash position in order to manage their working capital requirement and liquidity..Equally, international trade products become more important in managing risk and banks are seeking more annuity-based revenues with lower capital cost and less capital consumption while regulator are drafting raft to prevent another collapse.         In Africa, both corporate client and banks have had to invest in technology and operation supporting t...
Read more

Progressive Tax System and Income Equality

Image
  The major innovation in taxation in the economy is the the creation and development of progressive tax systems which play a key role in the reduction of income inequality and support  the economy growth      A proportional tax system, assesses tax rate to taxpayers regardless of income or wealth. It is meant to create equality between marginal tax rate and average tax rate paid. Under a this tax system, individual taxpayers pay a set percentage of their income regardless of total income earned. For example, an income tax of 10% that does not increase or decrease as income rises or falls results in a proportional tax. In this example, an individual who earns $20,000 annually pays $2,000 under a proportional tax system, while someone who earns $200,000 each year pays $20,000 in taxes.       The progressive tax system, assess tax liability as an individual or entity's income increases. Tax burdens are meant to b...
Read more

Turning Business around in the 21st Century

Image
   Many business today operate within complex and competitive environment and likely to suffer the crisis throughout their life cycle and this could lead to the failure or require recovery.Therefore it is very necessary to proffer solution in accordance with business structure, economic circumstance and financial availability.    Business today may required turnaround  due to fundamental challenging such as lack of fund, ineffective personnel, poor products/services, and weak marketing strategy which may lead to business distress and therefore will require a recovery strategy. Management Diagnosis   The success and failure of any business in the 21st century will depend on the management team capacity which is crucial for the good health of any business. Therefore management need to put together good business plan worthy of business growth, profitable and sustainable. A diagnosis of business performance and position should be regularly be re...
Read more