Impacts of higher taxes

Higher taxes can cause a lot of unfavorable things. Let's take a look at what higher taxes can cause - in a nutshell investment, will support corruption and reduce the competitiveness of the Czech economy.

High taxes - what do they cause?
High taxes - what do they cause?

V previous article I have shown the relationship between savings and capital. Simply put - savings are a prerequisite for raising capital. It creates savings offer of loanable funds, which are savings that a person or company offers to lend to other people or companies.

The most common form of offer of loanable funds are bank loans. Banks are merely mediators of cooperation between those who have savings and those who have investment opportunities. A bank loan is the result of that mediation, the bank lends the saved money to its clients.

The very function of the offer of loanable funds is an expression of the dependence of the interest rate and the amount of money saved. Simply put, with a higher interest rate on a savings account, for example, people will save more. However, we are still talking about a bidding feature that is affected by many factors. Pull this function up, therefore, changing this bidding feature may increase the cost. In other words - if we increase the "costs", so people will be at the same interest rate save less money.

What is such a cost of savings? For example, inflation, which will become more expensive - the "cost of living" is rising, money is devalued and people feel a real loss of money. It is logical that he prefers to provide some basic necessities of life (food, drink) before saving. The effect of higher inflation is also - among other things - that people save less.

It works similarly for taxes.

Taxes and savings

Raising taxes simply means that people will have a "cost of living". Their net income will be reduced, leading to people's preference consumption at present before consumption in the future. Furthermore, higher taxes also reduce income from various savings accounts, because tax income must also be paid on savings income (ie interest). Human motivation to save decreases, which leads to a reduction in the entire supply of loanable funds, ie people at the same interest rate they will save less.

This will lead to banks having less money to borrow, that is interest rates on bank loans will increase. Banks will not lend so willingly, which in other words means that will reduce investment private sector, which will also lead to less capital creation and less job creation. Can increase unemployment, notwithstanding the fact that when the interest rate on loans increases, some investment from the past they will become disadvantageous. There is waste and dismissal. Economic growth is slowing, the economic downturn is deepening.

Of course, you can argue that when the state collects more money in taxes, it can also invest more. But - does the state invest effectively?

The money that is collected in taxes goes through several "filters", which are also fed from this money. First, let's deduct the cost of the officials who collect the money from this money. Subsequently, the costs of officials who "take care" of the money, then the officials who "redistribute" the money, and subsequently the costs of organizing a selection procedure for some investment and finally the cost of paying the money (other officials). Much of the money has disappeared "On the way", even before the money even managed to invest.

Taxes and the market

Another adverse effect of higher taxes is also that higher taxes disrupt the division of labor in the economy and specialization.

We see examples around us - people who take a vacation to "cottage reconstruction" and more. Why don't these people take a company to renovate? Why are they "wasting" their holiday for reconstruction? The answer is simple - if taxes are higher, people will pay more from their income money to the treasury. People then do not have the money to order specialists for a particular one work, despite the fact that higher taxes make the work of specialists more expensive, which will also be reflected in the price.

People then prefer to renovate the cottage on their own, because they do not have to pay taxes from it. Yes, the reconstruction will need to be of lower quality, it will take longer, but there is no need to pay high taxes on it, which is certainly a great motivation. Instead of devoting themselves fully to their profession and buying the services of specialists from their income, they do many things themselves, even if they do not know them well. It reduces the overall efficiency of the economy and slows down economic growth.

Taxes and the gray economy

High taxes also lead people to try to avoid paying taxes in every possible way. Either they do a lot of things on their own, as mentioned above. However, the higher the tax, the higher the motivation to avoid paying taxes illegally.

One always weighs returns and risks when making decisions. If taxes are low, but penalties for possible evasion are high, it is not worth taking risks, they would rather pay the tax. Price for tax evasion is too high in that case. However, if the tax is higher, the potential revenue from tax evasion also increases. This makes it an attractive way to reduce costs.

Here's a good look at progressive taxation - The progressive tax system is much more prone to high tax evasion. People with higher incomes are more motivated by a higher tax rate to make a tax evasion.

Of course, the state can try to increase risks with higher taxes - that is, to increase penalties for tax evasion and to increase the level of control and restrictions. However, this creates an unfavorable climate police state.

Redistribution and corruption

If, due to the increase in taxes, the state budget revenue also increases (see Laffer curve) also means that the state then has to redistribute more money. This usually leads politicians to create various agendas and programs to support the iceberg, which also leads to a proliferation of bureaucracy, ie an increase in the number of officials (who have to take care of those agendas). Officials as such therefore have access to a much larger amount of money, they decide on a larger amount investment and public procurement. This motivates the private sector and officials to fight for change, because gaining access to large amounts of public money is so tempting.

In conclusion, I would like to point out that the most successful reforms of the last century have been reflected, among other things, in tax cuts.

So let's summarize the above: Higher taxes weaken people's incentives to work and save money and increase tax evasion, which has a negative impact on people's performance and economic growth.