Economics Today Identify the various taxes government utiliz

Economics Today Identify the various taxes government utilizes to fund the public sector and the impact on both consumer and producers

Solution

The different taxes levied by government are:

(1) Income tax, which is levied on income of individuals and corporations. As income tax rate increases, both individual and corporate net earnings go down. Individuals get lower disposable income, which lowers consumption demand, and corporations are discouraged to invest, so investment demand reduces. There is an overall reduction in national income.

(2) Sales / Excise / Value added tax is levied on goods and services produced. They are levied as a percent of sale price of the good or serice in question. Higher tax rate lowers the price received by producers, so they become discouraged to increase output if they cannot pass off majority share of the tax incidence to the consumers. As a result, aggregate supply goes down, causing an inflation.

(3) Import tax or tariff is levied on imported goods. A tariff raises domestic price of the good and amount of imports go down, since consumers face higher price. But at higher price, producers increase output, which increase net exports and improves the trade deficit.

(4) There are country-specific taxation system, for example in the US there is Social Security Tax, in India there is an educational cess, and so on.