Tax

==Economic effects==
[[File:GDP per capita PPP vs taxes 2016.svg|thumb| [[Public finance]] revenue from taxes in % of [[GDP]]. For this data, 32% of the [[variance]] of GDP per capita – adjusted for purchasing power parity (PPP) – is explained by revenue from social security and the like.]] 

In economic terms, taxation transfers [[wealth]] from households or businesses to the government of a nation. Adam Smith writes in ''The Wealth of Nations'' that

:"…the economic incomes of private people are of three main types: rent, profit, and wages. Ordinary taxpayers will ultimately pay their taxes from at least one of these revenue sources. The government may intend that a particular tax should fall exclusively on rent, profit, or wages – and that another tax should fall on all three private income sources jointly. However, many taxes will inevitably fall on resources and persons very different from those intended … Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect."<ref>{{cite book|last=Smith|first=Adam|title=The Wealth of Nations: A Translation into Modern English|url=https://books.google.com/books?id=hj2gCQAAQBAJ|year=2015|publisher=Industrial Systems Research|isbn=978-0-906321-70-6|page=429}}</ref>

The side-effects of taxation (such as economic distortions) and theories about how best to tax are an important subject in [[microeconomics]]. Taxation is almost never a simple transfer of wealth. Economic theories of taxation approach the question of how to maximize [[Welfare economics|economic welfare]] through taxation.

A 2019 study looking at the impact of tax cuts for different income groups, it was tax cuts for low-income groups that had the greatest positive impact on employment growth.<ref name=":0">{{Cite journal|last=Zidar|first=Owen|date=30 October 2018|title=Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment|journal=Journal of Political Economy|volume=127|issue=3|pages=1437–1472|doi=10.1086/701424|s2cid=158844554|issn=0022-3808|url=http://www.nber.org/papers/w21035.pdf}}</ref> Tax cuts for the wealthiest top 10% had a small impact.<ref name=":0" />

===Incidence===
{{Main|Tax incidence}}
{{See also|Effect of taxes and subsidies on price}}

Law establishes from whom a tax is collected. In many countries, taxes are imposed on businesses (such as [[corporate tax]]es or portions of [[payroll tax]]es). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become [[Effect of taxes and subsidies on price|embedded]] into production costs. Economic theory suggests that the economic effect of tax does not necessarily fall at the point where it is legally levied. For instance, a tax on employment paid by employers will impact the employee, at least in the long run. The greatest share of the tax burden tends to fall on the most inelastic factor involved—the part of the transaction which is affected least by a change in price. So, for instance, a tax on wages in a town will (at least in the long run) affect property-owners in that area.

Depending on how quantities supplied and demanded to vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer; and, contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden is distributed over the [[factors of production]] depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents), entrepreneurs (in the form of lower wages of superintendence) and customers (in the form of higher prices).

To show this relationship, suppose that the market price of a product is $1.00 and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product has an elastic demand, a greater portion of the tax will be absorbed by the seller. This is because goods with elastic demand cause a large decline in quantity demanded a small increase in price. Therefore, in order to stabilize sales, the seller absorbs more of the additional tax burden. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price).<ref>Parkin, Michael (2006), ''Principles of Microeconomics'', p. 134.</ref>

===Increased economic welfare===

====Government spending====
The purpose of taxation is to provide for [[government spending]] without [[inflation]]. The provision of [[Public good (economics)|public goods]] such as [[road]]s and other [[infrastructure]], [[school]]s, a [[social safety net]], public [[health system]]s, national defense, [[law enforcement]], and a [[Judiciary|courts system]] increases the [[Welfare definition of economics|economic welfare]] of society if the benefit outweighs the costs involved.

====Pigovian====
The existence of a tax can ''increase'' economic efficiency in some cases. If there is a [[negative externality]] associated with a good (meaning that it has negative effects not felt by the consumer) then a free market will trade too much of that good. By taxing the good, the government can raise revenue to address specific problems while increasing overall welfare.

The goal is to tax people when they are creating societal costs in addition to their personal costs. By taxing goods with negative externalities, the government attempts to increase economic efficiency while raising revenues.

This type of tax is called a [[Pigovian tax]], after economist [[Arthur Cecil Pigou|Arthur Pigou]] who wrote about it in his 1920 book "The Economics of Welfare".<ref>{{Cite news|last=Frank|first=Robert H.|date=5 January 2013|title=Heads, You Win. Tails, You Win, Too.|language=en-US|work=The New York Times|url=https://www.nytimes.com/2013/01/06/business/pigovian-taxes-may-offer-economic-hope.html |url-access=registration |access-date=10 September 2021|issn=0362-4331}}</ref>

Pigovian taxes might target the undesirable production of [[greenhouse gas]]es which cause [[climate change]] (namely a [[carbon tax]]), polluting fuels (such as [[petrol]]), water or air pollution (namely an [[ecotax]]), goods which incur public healthcare costs (such as [[Alcoholic drink|alcohol]] or [[tobacco]]), and excess demand of certain public goods (such as [[congestion charging|traffic congestion pricing]]). The idea is to aim taxes at people that cause an above-average amount of societal [[harm]] so the [[free market]] incorporates all [[cost]]s as opposed to only personal costs, with the benefit of lowering the overall tax burden for people who cause less societal harm.

====Reduced inequality====
Progressive taxation generally reduces [[economic inequality]], even when the tax revenue is not [[Redistribution of income and wealth|redistributed]] from higher-income individuals to lower-income individuals.<ref>{{Cite web|title=How do taxes affect income inequality?|url=https://www.taxpolicycenter.org/briefing-book/how-do-taxes-affect-income-inequality |date=May 2020 |access-date=22 September 2021|website=Tax Policy Center|language=en}}</ref><ref>{{Cite book|url=https://www.oecd-ilibrary.org/economics/economic-policy-reforms-2012_growth-2012-en|title=Economic Policy Reforms 2012: Going for Growth|date=24 February 2012|publisher=OECD|isbn=978-92-64-16825-1|language=en|doi=10.1787/growth-2012-en |url-status=live |archive-url=https://web.archive.org/web/20231018164559/https://www.oecd-ilibrary.org/economics/economic-policy-reforms-2012_growth-2012-en |archive-date= 18 October 2023 }}</ref> However, in a highly specific condition, progressive taxation increases [[economic inequality]] when lower-income individuals consume [[goods]] and [[Service (economics)|services]] produced by higher-income individuals, who in turn consume only from other higher-income individuals ([[trickle-up effect]]).<ref>{{Cite web|title=Could More Progressive Taxes Increase Income Inequality? |url=https://www.stlouisfed.org/on-the-economy/2020/may/could-more-progressive-taxes-increase-income-inequality|access-date=22 September 2021|website=St. Louis Fed |date=19 May 2020 |first1=Laura |last1=Jackson |first2=Christopher |last2=Otrok |first3=Michael T. |last3=Owyang }}</ref>

===Reduced economic welfare===
Most taxes (see [[#Deadweight costs|below]]) have [[side effects]] that reduce [[economic welfare]], either by mandating unproductive labor (compliance costs) or by creating distortions to economic incentives ([[deadweight loss]] and [[perverse incentive]]s).{{citation needed|date=October 2012}}

====Cost of compliance====
Although governments must spend money on tax collection activities, some of the costs, particularly for keeping records and filling out forms, are borne by businesses and by private individuals. These are collectively called costs of compliance. More complex tax systems tend to have higher compliance costs. This fact can be used as the basis for practical or moral arguments in favor of tax simplification (such as the [[FairTax]] or [[OneTax]], and some [[flat tax]] proposals).

====Deadweight costs====
[[File:Tax deadweight.gif|thumb|upright=1.35|Diagram illustrating deadweight costs of taxes]]

In the absence of negative [[Externality|externalities]], the introduction of taxes into a market reduces [[economic efficiency]] by causing [[deadweight loss]]. In a competitive market, the [[price]] of a particular [[Good (economics)|economic good]] adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur. The introduction of a tax causes the price received by the seller to be less than the cost to the buyer by the amount of the tax. This causes fewer transactions to occur, which reduces [[welfare economics|economic welfare]]; the individuals or businesses involved are less well off than before the tax. The [[tax burden]] and the amount of deadweight cost is dependent on the [[elasticity (economics)|elasticity]] of supply and demand for the good taxed.

Most taxes—including [[income tax]] and [[sales tax]]—can have significant deadweight costs. The only way to avoid deadweight costs in an economy that is generally competitive is to refrain from taxes that change [[economic incentive]]s. Such taxes include the [[land value tax]],<ref>{{cite book|author1=William J. McCluskey|author2=Riël C. D. Franzsen|title=Land Value Taxation: An Applied Analysis|url=https://books.google.com/books?id=jkogP2U4k0AC&pg=PA73|year=2005|publisher=Ashgate|isbn=978-0-7546-1490-6|page=73}}</ref> where the tax is on a good in completely inelastic supply. By taxing the value of unimproved land as opposed to what's built on it, a land value tax does not increase taxes on landowners for improving their land. This is opposed to traditional property taxes which reward land abandonment and disincentivize construction, maintenance, and repair. Another example of a tax with few deadweight costs is a [[lump sum tax]] such as a [[Tax per head|poll tax]] (head tax) which is paid by all adults regardless of their choices. Arguably a [[windfall profits tax]] which is entirely unanticipated can also fall into this category.

Deadweight loss does not account for the effect taxes have in leveling the business playing field. Businesses that have more money are better suited to fend off competition. It is common that an industry with a small amount of very large corporations has a very high barrier of entry for new entrants coming into the marketplace. This is due to the fact that the larger the corporation, the better its position to negotiate with suppliers. Also, larger companies may be able to operate at low or even negative profits for extended periods of time, thus pushing out competition. More progressive taxation of profits, however, would reduce such barriers for new entrants, thereby increasing competition and ultimately benefiting consumers.<ref>{{Cite journal |first1=Reuven S. |last1=Avi-Yonah |date=April 2002 |title=Why Tax the Rich? Efficiency, Equity, and Progressive Taxation |journal=The Yale Law Journal |volume=111 |issue=6 |pages=1391–416 |jstor=797614 |doi=10.2307/797614|author2-link=Joel Slemrod |last2=Slemrod |first2=Joel B.|s2cid=47005504 |url=https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=4587&context=ylj }}</ref>

====Perverse incentives====
Complexity of the tax code in developed economies offers perverse [[tax incentive]]s. The more details of [[tax policy]] there are, the more opportunities for legal [[tax avoidance]] and illegal [[tax evasion]]. These not only result in lost revenue but involve additional costs: for instance, payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. [[Perverse incentive]]s also occur because of non-taxable 'hidden' transactions; for instance, a sale from one company to another might be liable for [[sales tax]], but if the same goods were shipped from one branch of a corporation to another, no tax would be payable.

To address these issues, economists often suggest simple and transparent tax structures that avoid providing loopholes. Sales tax, for instance, can be replaced with a [[value added tax]] which disregards intermediate transactions.