Effect of Taxation on the People

Effect of Taxation on the People

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The distribution of wealth and income among various sections of society is affected by taxation in different ways depending on the nature and type of tax. The following examples illustrate how the nature of taxation affects the distribution of wealth and income among various segments of society:

a) Impact of Regressive Taxation upon distribution: Regressive taxation places a greater financial burden on the poor than on the wealthy. The wealth and income disparities that exist between the rich and the poor may widen as a result of regressive taxation.

b) Impact of Proportional Taxation upon Distribution: The wealthy and the poor are equally taxed under proportional taxation. Inequalities between them arise when the tax rate stays the same. As a result, the poor bear the brunt of taxation more than the wealthy do.

c) Impact of Progressive Taxation upon Distribution: The rates of taxation under the progressive taxation system rise with income. As a result, income and wealth disparities will decrease under this system. Through higher tax rates, the wealthy lose the majority of their income and wealth. As a result, income and wealth inequality tends to be reduced by the progressive tax system.

The types of taxes that are discussed below also have an impact on the effects of taxation:

a) Impact of Direct Taxes upon Distribution: The income and property of a person are the subjects of direct taxes. It transfers income to the government in an effort to lower the wealth of the wealthy. These resources could be used by the government to improve the lives of the poor.As a result, the distributional effects of all those taxes that disproportionately affect higher-income groups may be favorable.

b) Impact of Indirect Taxes upon Distribution: Commodities are subject to indirect taxes. They heavily affect people with lower and middle incomes, who spend a lot of their money on goods. In this scenario, indirect taxes have a negative impact on distribution. However, if necessities are exempt from taxation or subject to low tax rates while luxuries are subject to higher tax rates, indirect taxes may be progressive.

Other Impacts of Taxation: In this section, we investigate the impact of taxation on employment and its regulatory impact.

a) Implications for Employment: The economy will see an increase in employment if taxes are used to fund development projects. The problem of unemployment and the recession will get worse if taxes have a significant impact on savings and investment.

b) Impact on Stability of Prices: During times of inflation, taxation ought to have the effect of reducing the people's excess purchasing power. This can be accomplished by raising the current tax rate and imposing new taxes as inflation rises. It will contribute to price stability in this way. In contrast, taxation reductions during the depression contribute to an increase in employment and economic activity. Therefore, the purpose of taxation during a depression ought to be to increase people's purchasing power by allocating tax revenue to the development of activities that generate employment and income.

c) Effect of Regulation: Consumption and projection can be controlled through taxation. The instrument of taxation can be used to plan and regulate production's composition and structure. For instance, if the government wants to reduce the production of a particular product, it would like to impose high taxes. Similarly, tax breaks and concessions can be given to encourage the production of particular goods.