Taxation: High or Low?
Before any discussion about whether or not taxes should be high or low, one needs to define the term tax, and any subsets thereof. A tax is a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc. (Dictionary.com) There are two main types of taxes, direct and indirect. Direct taxes are taken directly from the income of the person paying taxes. These taxes are usually things like income tax, property tax and any other tax the government decrees should come straight from the income. An indirect tax is a tax that is placed on consumables and every consumer pays it if they buy a product that is taxed. Indirect taxes are called such because instead of being taken directly out of the income, they pass through the hands of producers before reaching the government. An example of this type of tax would be the Value Added Tax (VAT). In addition to being either direct or indirect, taxes can be progressive, proportional or regressive. A progressive tax is a tax (usually a direct tax) that as income increases, so does the taxation rate. Many countries around the world employ this type of income taxation. A proportional tax can be either direct or indirect, and it is when the rate of taxation is the same no matter how large an income. A regressive tax is usually indirect and is when the proportion of a consumer’s income spent on the tax is higher for the poor than the rich. For example, if the tax on an item is $4 and a poor person makes $400 a month, they have to spend 1% of their income on the tax alone, while a richer man making $4000 a month only has to pay 0.1% of their income to that tax. The many ways of taxation and its uses is one of the reasons making decisions about taxes is so difficult.
Now that the types of taxes have been defined, what is the difference between having high taxes and having low taxes? Taxes are used to pay for things like transfer payments (such as pensions and child care) as well as government spending. In a country where there are high taxes, transfer payments and government spending can be at their peak. This would mean that the country could improve its development through supply side policies. It also would mean that the populace would not have to purchase as many services (such as healthcare). An example of a country with high taxes is Denmark. “The administration of hospitals and personnel is dealt with by the Ministry of the Interior, while primary care facilities, health insurance, and community care are the responsibility of the Ministry of Social Affairs.” (Nations Encyclopedia). This is beneficial to a country because it improves their human capital tremendously. In countries with low taxes the consumers in the economy can spend a lot more money and boost the GDP of said economy. This helps the economy develop through demand side policies because it allows the economy to grow through increased demand. A country that has such an economy would be the United States. The average income tax in the United States is 15%, which is much lower than in other countries. However, the GDP of the United States, boosted by the demand economy, is $14.14 trillion. Overall, there are many reasons to support either view. However, in my opinion, higher taxes and helping the economy grow through supply side policies is really the way to go.