Effect of Taxes

Effect of Taxes

1.    Reduces Purchasing Power

Income tax on personal income reduces the purchasing power of the individual, because some of the income was eaten up by the taxes, and individual now has low amount for expenditure.

2.    Reduces overall Demand

As explained above that taxes will reduce purchasing power, which would ultimately have negative impact on the overall demand i.e. overall demand in the economy will shrink.

3.    Reduces incentive to work

If there is progressive taxation system i.e. high income will be taxed at high rate, then there will be little incentive for more work, because more work will not be generate more proportional income.

4.    Low Saving & Reduced investment

Taxation will lower the saving level and therefore investment will also reduce in the economy.

5.    Income Distribution

Taxation will lower the difference between unequal distributions in the economy. This target can be achieved by progressive taxation i.e. high income high tax rate.

6.    Unemployment

Taxation will create unemployment in the economy due to reduced demand, saving and investment. These all factor will adversely affect the employment level in the economy.