Tax affects the society, people individuals and also families.
Tax incentives
Tax can affect both the demand factor and supply when they are influenced by motives. Most people can be induced to work when the marginal tax rates on their salaries and their wages have been reduced. Low skilled workers can be motivated to join the labour force when their income tax credits have been expanded when there is low marginal; rates on various assets such as dividends capital gains dividends, there is a higher chance that most people can set aside some money for savings. Furthermore, when there is a reduction of marginal tax rates to companies, companies can start investing domestically. This means there will the creation of job opportunities to local people, thus reducing the level of unemployment. There will also be the generation and creation of new ideas when there are tax breaks. Most people can make their business ideas into reality, knowing that they will not be taxed for their business ideas. Don't use plagiarised sources.Get your custom essay just from $11/page
Besides the positive effects, tax can also have negative effects on the supply. If there is a tax cut to workers, e.g. after-tax income, there is a higher chance that most employees will start to take more leisure time and work less. Provision of tax can also affect the deployment of investment capital; for example, in case of tax favours housing compared to another form of investments. Housing investments will increase, thus reducing the social welfare and various economic output.
Budget deficit.
Taxes may cause a lower budget deficit, thus lowers economic growth. When economic is lower, it means that all government operations are being funded by money borrowed from external sources instead of using these funds to develop the country. This causes crowding of private investments, reducing their chances of blooming in the near future. Either way, the deficit has a negative impact on the future of the country if there is an increase or reduction of the marginal taxes on individual taxes there may be a negative or positive impact depending on the increase or decrease deficit of saving and investments.
Foreign direct investments
Taxes have an effect on foreign direct investment. It has an impact on the post returns and returns of Foreign direct investments when the wedge is greater. There is a higher chance of low incentives taken by foreign direct investments. This does not mean when there are higher taxes. It will cause low domestic investments. Other factors such cost of labour, market openness and other regulatory hurdles will be taken into consideration., but when the returns of foreign direct investment are high there will be corrosion of these factors
Resource allocation.
Tax can influence the volume of production when resources are diverted to the desired direction; taxation may have some positive benefits on the production. Taxes on harmful substances will reduce their level of consumption. This will make most consumers to shy away from the product. Thus the scarce resources will transfer to other valuable products which are essential to economic growth . in simple terms taxes promote balanced development by distributing unwanted resources to those that essential to human lives. Nevertheless, there some taxes which may have a negative effect on the production of goods and services. When huge taxes are imposed on essential products, it may result in the diversion of resources from one region to the other. This unhealthy diversion may cause production and consumption of these products to reduce.
Income distribution
Last but not least
Taxes will affect income and wealth distribution, thus impacting the growth and development of the economy. When taxes are high, there is a reduction in income inequality since higher taxes will be blown to the affluent people. But when heavy taxes are imposed on non-essential and luxury goods, it may have a positive impact on income distribution. this will also produce unfavourable effects on the ability to work and save