Tax system contribution to economic growth Essay

Tax system contribution to economic growth - Essay Example In other words, without investments, innovation, production and risk taking there will be nothing about economic growth. Production is of great significance because it is the only link between all drivers of economy. Most taxes are often concentrated along labor, investments and production (Economic Review Committee (ERC), 2012). For instance, the United Kingdom as well as other countries in developed and developing world charges income tax on returns from labor, capital gain tax on capital, excise and Value Added Tax (VAT) on production and corporate and property tax on investments. This is a clear manifestation that factors that drive economic growth are the major sources of revenue to the government thus the link between economic growth and tax system. Policy makers are often very cautious with taxation policies proposition considering that these can make or break a nation. Slemrod (2003) asserts that a government can lose big on its tax revenue if it is careless with its tax syst ems especially during this tough economic time that the entire world is healing from the impact of global financial crunch. For instance, multinational companies are likely to shift to countries with low corporation tax rates if the parent country is charging high taxes. Countries that want to advance their economies are renowned for luring investors both foreign and local by offering favorable tax laws and reliefs. A number of countries are carrying out several reforms on their tax systems owing to the pressure from pundits and economists who continue to stand by the view that high taxes are not good for economic prospect. This view is enhanced from the existing empirical studies that involve a review of a number... This essay is the best example of thorough analysis of the mechanisms, by which taxes affect economic growth. It is argued in the paper, that the tax system make tangible contribution to economic growth Economists and policymakers have conducted several studies for a number of years with an objective of establishing the link between tax systems and economic growth. Most, though not all of these studies did establish an undesirable effect of taxes on different measures of a country’s economic performance. A number of taxes especially income, property, capital gain and consumption based taxes have always attracted a lot of attention with respect to their impact on economic growth. Economic growth, which refers to an increase in countries total output over a specified period, is driven by three important factors namely capital, labor and technological advancement. Taxes interfere with income from economic activities that is production of goods and services . This means that lowering or increasing taxes will certainly affect income drawn from an economic activity. For instance, increased income tax will translates to wider gap between gross and net earnings and vice versa. Returns from labor is an important motivator for engaging in gainful employment. However, tax systems especially high personal income tax often discourage people from engaging in labor market. Taxation of factor capital is another important area of consideration when trying to bring out the link between tax system and economic growth.