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Taxes are compulsory financial contributions imposed by a government to raise revenue. There are direct taxes and indirect taxes; direct taxes are levied directly on an individual or organization, such as income tax while indirect taxes are levied on goods or services such as value added tax or exercise duties. As the definition says taxes are mostly used to raise revenue of governments, but governments can have other reasons for taxation, too.

  • Market failure can be corrected with taxation and efficiency can be increased – governments can impose a tax on unhealthy products such as cigarettes to increase the health of their workers that then can work longer, pollution can be controlled by imposing a pollution tax and people might read more if the VAT is removed from books.
  • The economy as a whole can be influenced just as well. Inflation, unemployment and the balance of payments can be managed by governments by increasing or decreasing taxation.
  • The income can be redistributed by taxes, too. If a government thinks that the distribution of resources is unequal they can impose higher income taxes on those who get more and use the money they get from that and give it to those who get less or reduce income taxes for those.

Taxes are of great importance to governments, markets and whole economies. Due to this almost every government argues about them. However, taxes can also influence the happiness of citizens if governments use the money properly. The five happiest countries of the world are Denmark, Finland, Norway, Sweden and the Netherlands and each one of them is in the top 20 of the countries that receive the highest tax revenue in % of the GDP.

Now, I’d ask why those countries are the happiest in the world and the answer is pretty simple. Life in those countries might be expensive especially because of the taxation, but people get something for their money in return. Let’s take Sweden as an example.

The tax burden is 48.2% of the GDP, which is by far one of the highest in the world. The personal income tax can vary from 29% up to 49% between 60% depending on your income, the local government and state income tax. By paying those taxes Swedes get several benefits though:

  • Free education – kindergarten fees are low compared to other countries and there are enough kindergartens therefore it is easy for parents to find a place for their child and keep a job. Public and private schools are free and children receive free lunches. As private schools are free, they can receive a more individual education, too. If one’s talents lie with sports rather than math it might be better for them to go to a private school that focuses on sports. They can do so because it doesn’t cost them anything. Someone in another country, for example Germany, has to pay for such a private school. They might not be able to afford this, thus they wouldn’t get such an individual education that fits their needs perfectly.
  • Childcare – not only is there free education for children, but also other benefits, such as free health and dental care for children under 18 and a child allowance of £1,080 a year per child. The parental leave is important, too. Parents can have a joint parental leave for 480 days. 390 days they receive 80% of their income while for the other 90 they receive £14.60 a day. In theory parents split the leave fifty-fifty, but they can decide themselves how they want to split the time. Each parent has to take a minimum of 60 days though and if someone raises a child alone they have to take the whole 480-day period. However, they don’t have to take whole days of, but can also choose to only take some hours. Normally, only mothers get to leave their job and oftentimes it is not paid much. The system in Sweden allows both parents to take an active part during the early stages of the children’s life.
  • Pensions and care for the elderly – there is a progressive state pension system: the more you earn the higher your pension will be later on. You can start getting money from it from the age of 61 and there is no upper limit, but you get more money the later you start. There is also a guaranteed minimum pension for those who have not worked enough, so that elderly people don’t have to be afraid of not getting any money.

Considering the example of Sweden it becomes clear that high taxes are not always bad as it is portrayed by most people. As long as the state uses the taxes to help their citizens those will be willing to pay them.

Category: IB2 Economics | Views: 292 | Added by: Nele | Rating: 0.0/0
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Anderton, Alain. Economics. 5th ed. Essex: Pearson Education, 2008. Print.

Fouché, Gwladys. "Where Tax Goes up to 60 per Cent, and Everybody's Happy Paying It." The Observer 16 Nov. 2008.

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