III. Other Effects of Taxation
1. Effect on Employment: In case where the taxation revenue is deployed to set up industries and are utilised on development projects then the outcome of such deployment of resources will help in generating employment opportunities. Excess capital available with people due to low taxes might help in setting up of new business. On the other hand, when the taxation policy affects the economy negatively, then it will effect employment and capital formation adversely.
2. Regulatory Effect: Taxation is not only a tool to generate revenue but is also a tool to regulate consumption and production. Taxation has a direct effect on the scale of production. If the government wants to curb the production of a particular commodity, heavy taxation is levied, which will lead to an increase cost, customers will react instantly and the demand of the product will decrease. Similarly, in a case when government wants to scale up the production of certain commodities, government will lift up tax, or will provide tax exemptions and concessions which will result in a decreased price offering to customer and the demand shall increase and so will be the production.
3. Effect on Price Stability: Taxation is an instrument available with government, and the same is used to stabilise price during inflation. During the time of inflation, public look for government to erupt the economy and government use taxation as a tool. The main objective during inflation is to reduce the prices as early as possible, in order to do this government increases the tax rates, which results in lowering the purchasing power and stabilising the prices.
Economic Effects of Taxation
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.
Table of Content
- Economic Effects of Taxation
- I. Effects of Taxation on Production
- II. Effects of Taxation on Distribution
- III. Other Effects of Taxation