Question

During times of National Debt (such as now), the government must come up with ways to increase the National Revenue (tax collection). Describe the consequences, both positive and negative, of increasing taxes on upper income individuals and lower income individuals. Which of these would be most beneficial to society as a whole? Please be clear in the argument for each.

Answer 1

Ans: Increasing the tax rate is always an issue and becomes a point of discussion. On one hand where by ncreasing tax rate, govenment can generate more revenue to cover up the debt it has incured to make the development and welfare of the state, on the other hand creates a sense of havoc among the people as they are now paying a greater amount of their earning to govenment as taxes.

Higher Maginal Tax rates may affect the economy in long run via the suppy side economics. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources.The long-run effects of tax policies thus depend not only on their incentive effects but also their deficit effects.

In case of high income groups, Capital gains via tax rate increases appear to increase public saving and may have little or no effect on private saving. Consequently, capital gains via tax increases is likely have a positive overall impact on national saving and investment. On the other hand, the same not always holds true for the lower income individuals as they are now paying a greater amount of their essential savings , which cannot be coined as luxury saving, as a fact of which he may be prone to difficult time taking any investment decision.

For the lower income group it is even possible, that such rise in tax collection may trigger them to work less and prefer leisure more.Thereby substitution effect overpowering income effect in such cases and the potential growth may get hampered. Moreover, it may create a scenario where they cut down on their daily expenses and thereby decreasing their consumption. However, for the rich upper classes, this situation is not so likely as they are paying omore of what they earn in excess and their personal expenses don't get hit that badly.

Any negative impact on economic growth from increasing taxes on high-income people would be more than offset by the positive effects of using the resulting revenue gain to reduce the budget deficit. Tax increases can also be used to fund, or to forestall cuts in, productive public investments in areas that support growth such as public education, basic research, and infrastructure. So, having a broader tax base would be more beneficial so that a particular section does not bear the entire burden of the tax rise. Depending on the income bracket, the tax policy should be made keeping in mind, the welfare of its people. The one earning higher would be less worse off and less affected by paying greater taxes than the ones struggling for even their basic requirements will , with the impact of such tax rise.