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How do taxes affect the economy?What happens to the economy when the government raises...

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xavierlee1011 | Student, Undergraduate | eNoter

Posted August 6, 2012 at 2:16 PM via web

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How do taxes affect the economy?
What happens to the economy when the government raises or lowers taxes?

Im trying to figure out how to state these questions from an economic point of view not political and getting really confused.

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nikasho0100 | Student , Grade 12 | Salutatorian

Posted August 11, 2012 at 7:07 AM (Answer #1)

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Taxes can have a impact on the economy as more the government cut taxes more revenue can be earned and the revenue earned can be used to improve the infrastructure of a country, distribute to the poor, correct a budget deficit etc. all this can be used for the well being of the country.

If the government raise taxes all the above benefits can be gained but however there is not always a guarantee that the above benefits can be gained as for example if government charge very high taxes on goods people would not demand for more goods which can even lead to unemployment in the country, and even worse.

however if the government lower the tax rates then people would now find prices of some goods falling therefore demand for more good and services however this will create inflation in the long run. It even can create a balance of payment deficit as they will find foreign products much more cheaper with a low tax.

So there is a positive and a negative effect of government lowering and increasing tax. For example if their is to much pollution  from vehicles, if there is very high traffic congestion the government would increase the tax on vehicles in order to reduce the vehicles being brought.

Whether the tax is beneficial or not all depends on the countries economic situation.

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