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Taxes And How It Affects The Growth Of The Country

888 words - 4 pages

Taxes are largely considered to be responsible for the following: a.. They distort business thinking; b.. Encourage the misallocation of economic resources; c.. Divert money to bizarre tax-motivated investments; d.. Absorb unacceptably large chunks of the GDP; e.. Deter foreign investment; f.. Morally corrupt the population, encouraging it to engage in massive illegal activities; g.. Adversely influence macroeconomic parameters such as unemployment, the money supply and interest rates; h.. Deprive the business sector of capital needed for its development by spending it on non productive political ends; i.. Cause the smuggling of capital outside the country (capital flight); j.. Foster the ...view middle of the document...

This way, more tax payers were supposed to be caught in "the net". This failed dismally. People found ways around this relatively unsophisticated approach and frequent and successive tax campaigns were to no avail. So, governments tried the next trick in their bag: they shifted from progressive taxes to regressive ones. This was really a shift from taxes on income to taxes on consumption. This proved to be a much more efficient measure albeit with grave social consequences. The same pattern was repeated: the powerful few were provided with legal loopholes. VAT rules around the world allow businesses to offset VAT that they pay on consumables and services against VAT that they are supposed to pay to the authorities. Many enterprises end up receiving VAT funds paid by individuals who do not enjoy these tax breaks. Moreover, VAT and other direct taxes on consumption were almost immediately reflected in higher inflation figures. As economic theory goes, inflation is a tax. It indirectly affects the purchasing power of those not knowledgeable enough, devoid of political clout, or not rich enough to protect themselves. The salaries of the lower strata of society are eroded by inflation and this has the exact same effect as a tax would. This is why inflation is called "the poor man's tax". When the social consequences of levying regressive taxes became fully evident, governments went back to the drawing board. Regressive taxes were politically and socially costly. Progressive taxes resembled Swiss cheese: too many loopholes, not enough substance. The natural inclination was to try and plug the holes: disallow allowances, break tax breaks, abolish special preferences, and eliminate loopholes, write-offs, reliefs...

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