The Effects of Taxation and Price Controls on the Economy
By Ralph Goff
ECONOMIC THEORY (AXIA)
Instructor: GREG KROPKOWSKI
January 8, 2010
There are eight widely accepted economic goals of the United States: economic growth, full employment, economic efficiency, price stability, economic freedom, equitable distribution of income, economic security, and balance of international trade. The effect of taxation and price controls on the economy range from the curtailment of the supply of goods to an increase in costs. There are four main sources of revenue are the personal income tax, payroll taxes, corporate income taxes, and excise taxes. In 1999, the personal income tax accounted for 48% of tax revenues. Payroll taxes accounted for 35% of tax revenues. Corporate income taxes were 10% of revenues. Excise taxes were 4% of tax revenues (Powell Center.Org.).
Government officials should consider taxing products for which the price elasticity of demand is inelastic. Liquor, gasoline, and cigarettes are examples of goods with inelastic demand on which tax increases are imposed to raise tax revenue. When a product has an inelastic demand, an increase in taxes will increase total spending on the product and hence the revenue collected by government. There will be a negative effect on the quantity consumed, and thus employment in the industry, but the employment effects will be less harmful than if the product taxed was elastic. Taxing a product for which the demand is relatively elastic is likely to reduce tax revenue from the product and reduce significantly employment in the industry. Such a situation arose in 1991 when the U.S. Congress imposed a luxury tax on yachts costing more than $100,000. Congress thought that the demand for yachts was relatively inelastic, but it proved to be more elastic than originally thought. Employment in the boating industry fell significantly and the tax produced minimal revenue for government....