220.127.116.11 The Impact of Tax on People’s Behaviour
Taxation changes people’s behaviour. Sometimes politicians intend to deter people from an activity, but in some cases the economic impact may be an unintended side-effect:
- Selective taxation on some goods is a way of discouraging people from buying them. This has been part of many governments’ strategies in reducing smoking, for example.
- Taxes on imports, tariffs, are a way of encouraging people to buy domestically-produced goods; they are a form of protectionism – with serious drawbacks, as discussed later in this chapter (18.104.22.168).
- Payroll taxes discourage employment, by increasing the attractiveness of mechanisation or sending the work elsewhere.
- As discussed later (22.214.171.124), a carbon tax is one promising strategy for encouraging a reduction in the emission of greenhouse gases.
- A tax based on property values discourages property improvement. With a tax based on land values, owners would have an incentive to improve properties and put the land to its most profitable use – perhaps building houses for example – rather than leaving the land unused and waiting for its value to increase.
In addition to these specific aspects of behaviour, there is an overall impact of tax wherever it is levied: an increase in tax reduces disposable income, thereby reducing the amount of money that people have available – whether as consumers, or to save, or to invest.
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