3.2.4 Forms of Taxation
The various forms of taxation have different economic impacts individually, and a collective impact; some are chosen for political impact.
Government spend is ultimately funded by tax receipts. For any desired level of government spending, the tax must come from somewhere. The choice of what to tax is partly an economic matter – whatever does least damage to the economy – and partly political: considering the unpopularity of the tax and taking account of its relative impact on rich and poor people. The political sensitivities are discussed in a later chapter (6.7.1).
Governments levy tax to pay for their spending: shared infrastructure, the protection of property, and benefits for those in need, as described above (3.2.3). The health and education of the workforce are also funded by governments In some countries. There is a perpetual tension between the need for more tax to improve these government services and the need to leave sufficient funds for the rest of the economy to function well. Increases in taxation depress economic growth: macroeconomic effects, as described in the next segment (3.3.8).
Most taxation is levied at national level In practice, although there may be scope for changing the subsidiarity of the control of government spending and the associated tax collection so that more decisions can be taken locally (3.4.5). Analyses of national tax budgets are often available online, for example:
The US President’s Budget.
The British government’s monthly summaries of its tax income.
Forms of taxation have different economic effects, as examined in the following sub-sections:
● Wealthy people pay a higher proportion of their income and wealth under systems of ‘progressive’ taxation (3.2.4.1), but ‘regressive’ systems are disadvantageous to the less wealthy. Taxes on incomes, wealth, and land, are typically progressive, whereas taxes on consumption and flat taxes are regressive.
● Some taxes, like income tax and sales tax, are immediately visible to the public. Other taxes, though, are hidden: ‘stealth taxes’, which let governments increase their revenue with less political opposition (3.2.4.2). Taxes on pension funds and companies fall into this latter category, and Donald Trump’s tariffs on imports only indirectly affect consumers.
● Taxation changes people’s behaviour (3.2.4.3), sometimes in unintended ways: governments use tax to steer people’s behaviour away from buying some items, such as cigarettes and fuel which emits greenhouse gases; tariffs and payroll taxes depress economic growth; property taxes deter property development but land taxes do the opposite.
● Tax exemptions, evasion, and aggressive legal tax avoidance all shift the burden of taxation onto other people (3.2.4.4). Some very wealthy international corporations avoid paying their fair share of tax. Some politicians, Including Vladimir Putin for example, use overseas tax accounts to avoid paying tax and to hide their wealth from their populations.
● Some taxes may be targeted so that poor people don’t pay them (3.2.4.5). The effect, though, is to benefit very wealthy people at the expense of those whose incomes are just above the threshold.
● There are constraints on how much tax a government can raise, before higher tax rates lead to lower total receipts (3.2.4.6). Individuals find ways of avoiding excessive rates of tax, in the so-called Laffer effect’, and a country’s economy is depressed in total by a high tax burden.
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