Economic Effects Of Tax Returns

Economic Effects Of Tax Returns

If you work, you pay taxes. Paying taxes yearly is just a regular part of life for most people, but many of us fail to think about how taxes affect us and the economy. Whether you have an accountant who uses tax practice management to ensure your taxes are properly prepared or you use a simple app during tax season, you likely forget about taxes as soon as you’ve received your refund or paid them. Or maybe you look at your pay stub every two weeks and wonder why the government needs so much of your hard-earned money. Most people know their taxes go to the government and can help fix roads and pay government workers, but they don’t know how it affects their daily lives through the economy. Let’s discuss the economic effects of tax returns to help you understand more about them.

Taxes and the Economy

Many economists believe that higher taxes can generate more revenue for governments desperately needing it. However, other experts believe raising taxes can negatively impact the economy, leaving the average worker with less money to spend. Instead, those individuals want to lower taxes to positively impact the economy because more money will go into it.

 

This isn’t a new argument. President Reagan believed the best way to stimulate the economy was by reducing taxes, especially for those who earned more–those who would be more likely to invest in businesses and increase job growth. Of course, during this time, there was substantial inflation, but once it was under control, there were more jobs and more money in the economy.

 

Since then, presidents can’t seem to agree on whether or not increasing or reducing the tax rate will improve the economy. So let’s take a look at the possible effects of both sides.

Higher Taxes

Working Americans don’t want higher taxes, so increasing the tax rate could affect many households already living paycheck to paycheck. In addition, since it’s unlikely businesses will increase salaries, individual workers will take home less money to spend on their family’s basic necessities. In general, higher tax rates can discourage employees from working. Even though this wouldn’t be the employer’s fault, they would face unhappy workers if they didn’t increase their salaries.

 

In addition, ordinary people won’t be able to save because they’ll have less to spend, which means ultimately reducing any investment opportunities they’ll have. Higher taxes may also result in fewer people being eligible for residential loans, directly impacting the housing market.

Lower Taxes

Lowering taxes means consumers will have more money to spend, so they’ll save, invest, and shop more. Unfortunately, this also means that government officials will have lower revenues, which may impact future generations. In addition, many believe that reducing tax rates will only benefit high-income families while reducing government services low-income families need. For example, if the tax rate is lower, everyone can benefit from earning more from their jobs. However, it means less money for government programs like Medicare, which millions rely on for healthcare coverage.

 

Reducing tax rates focuses on the demand side of the economy. Essentially, individuals with more money to spend will engage in more shopping, which will help companies expand and increase job growth. In addition, individuals can save and invest more money to reduce unemployment even further.

Tax Equity

There are two types of taxation: horizontal and vertical equity. Horizontal equity is when everyone is taxed the same amount, while vertical equity is when people are taxed based on their income. With vertical tax equity, high-income earners will have a higher tax rate, ultimately paying more in taxes.

Horizontal equity simply doesn’t work because every household is different. Reducing taxes can affect a family who wants to save more differently than one who already earns more. In addition, it will benefit individuals who make more money because of how much they make, so it doesn’t help middle to low-income families.

Why Can’t We Agree?

Ultimately, tax policies generate revenue for governments and allow them to run public services. However, current tax rates aim to tax those less affected by the burden, such as high-income earners. Of course, this isn’t always the case. Many high earners find ways to reduce their taxes, and some corporations don’t pay taxes. This is called tax shifting and occurs when the taxpayer transfers the taxes to someone else. For example, a corporation can transfer the taxes to the customer by increasing the sales price of their products. In addition, the government offers many tax cuts for the wealthy, which can lead to income inequality.

 

It’s generally accepted that raising taxes on the wealthy will ultimately affect economic growth because they’ll raise their prices to earn more, potentially pricing consumers out of the market completely. These corporations will also aim to find new ways to cut costs, including layoffs or lower-quality products.

 

In addition, corporations have strategically positioned themselves to pay lower or no taxes based on several credits. For example, Amazon has avoided paying corporate taxes due to tax credits worth over a billion dollars.

The Economic Effect of Tax Returns

Tax returns don’t have an economic impact; they’re simply documents helping you file your taxes. However, the money that goes to taxes to fund the government and its projects significantly impacts our daily lives. Of course, experts simply can’t agree on whether raising or lowering the tax rate is an effective way to stimulate the economy. In addition, making changes too quickly can lead to inflation, layoffs, and poor economic health that affects everyone except the super-wealthy.

 

Unfortunately, we don’t have a say in our taxes and simply have to put up with them to earn a living. However, tax rate discussions are always popular among our leaders, so it’s worth paying attention to tax policies and how they affect your financial health.

 

Ashley Nielsen

 

Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a freelance writer who loves to share knowledge about general business, marketing, lifestyle, wellness, and financial tips. During her free time, she enjoys being outside, staying active, reading a book, or diving deep into her favorite music.

 

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