I. Effects of Taxation on Production

1. Effect on the Ability to Work and to Save: Levying taxes can result in the depletion of disposable income of the taxpayers. This will result in reduction of expenditure on basic stuff which are required to be consumed for the sake of living and improved efficiency. As the efficiency of taxpayer suffers ability to work also declines due to lack of efficiency, and the affects can also be visible on savings and investment. However, it has been observed that the effects of taxation are clearly more visible on middle class or lower middle class section of society and rich class majorly remains unaffected by the effects of taxation, as they possess disposable income which can be exhausted to meet tax payments.

2. Effect on the Will to Work, to Save and to Invest: Any financial obligation denotes burden. Effect of taxation on willingness to Work, Save, and Invest deals with the psychological state of people’s mind, as people find taxation as a monetary burden. Taxes which are expected to continue in future, it will reduce the willingness to work and save of the taxpayers, whereas taxes which are of temporary nature i.e. to meet any emergency situation or to meet any environmental hazard or taxes which are imposed on gains like lottery income or online gaming do not produce such adverse effect on desire to work, save and invest.

3. Effect on Allocation of Resources: Proper allocation of resources can be the key factor for any economy to excel. Resources shall be diverted to the most important areas which can help to contribute towards overall growth of economy. By diverting resources to the desired directions, taxation can influence both volume and the size of production and the pattern of production in the economy. Such proper allocation could be beneficial on production. High taxation on harmful drugs, commodities and intoxicants will reduce their consumption which will discourage production of these commodities and the available resources will now be diverted for the production of essential commodities which are useful for economic growth.

Taxes are defined as the basic source of revenue for the government and can be described as the money that people are required to pay to the government, and government deploys these inflows in public service and helps the economy move at a pace. It is a burden laid upon the citizens for the income they earn or the assets they hold, tax is not a voluntary contribution to fund public service rather it is an enforced contribution directed by law. Taxation is levied by government bodies to incur common welfare expenses for society and to meet expenses related to Defense, Medical infrastructure, Road connectivity, Education, etc. It is the Indian constitution from which the government derives power to levy and collect taxes. Moreover, taxes can be of two types i.e.

• Direct Taxes: In case when the tax is levied directly on the personal income earned by the person or the personal assets held by the person then such tax is called a direct tax, i.e. where the burden of tax is directly on the person who incurs any earning or profits. Examples are Income Tax, Corporate Tax, etc.
• Indirect Taxes: In cases when the tax levied on the price of goods or services which is consumed by the person. Here, the incidence of tax keeps shifting from one person to another till the goods or service reaches the final consumer. Examples are Goods and Service Tax (GST), Custom Duty, etc.