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. ...