taxation

The higher the tax rate, the lower the incentive for the unemployed to seek work – or for existing workers to work overtime

In 2022, the Adam Smith Institute calculated that average earners in the UK work from the 1st January to the 8th June (Freedom Day) to pay their taxes – all income after that point belongs to them

The Laffer curve illustrates the relationship between increasing tax rates and the level of government revenues received

The broad idea is that as tax rates increase, a point will be reached where disincentivized workers work less resulting in less income and less government tax revenue. More people will actively seek to avoid paying tax (tax avoidance) or try to move their income elsewhere

Tax rate increases up to point A, will result in an increase of tax revenue. Further tax rate increases from A to B result in a loss of tax revenue from C to D

A progressive tax system redistributes from those with higher income to those with lower income and reduces income inequality

Sometimes the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes

If the tax rate increases, more money is withdrawn from the circular flow of income (leakage)

This will likely cause a reduction of aggregate demand (AD) as firms and households have less disposable income

As AD slows down, fewer workers may be required for production and unemployment may increase

An increase in indirect taxes reduces disposable income and so workers may petition their employer for a salary increase

If they receive the increase the economy may face a wage-price spiral

Indirect taxes also increase costs of production for firms possibly leading to cost-push inflation

An increase in taxes can reduce disposable income which is likely to reduce the level of imports

This may improve the trade balance (exports – imports)

If the rate of corporation tax increases relative to other countries, it may result in less inward foreign direct investment