Friday, April 17, 2009

Higher taxes lower revenue

The toughest Budget ever

At some point taxation affects consumption, and when consumption drops the amount of revenue you receive with higher taxes becomes lower than you would receive with moderate taxation. The same is true for income tax, income taxes are ultimately covered by the purchase price, so to the consumer VAT and income tax both serve to raise prices and reduce consumption. Given the high level of taxation in the UK, I think the question should probably be asked, is the government already receiving peak revenue from the economy? Is it actually possible to raise more revenue from the UK without a) the disaster of reducing revenue and b) damaging the economy in the process. If not, then we are in bigger trouble than we thought.

Posted by stillthinking @ 02:21 PM (974 views)
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4 thoughts on “Higher taxes lower revenue

  • Reuters…..tickertape news……..economy in trouble………..oh no, the King is dead

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  • Tax changes upon the nation will be treated in the same way a savvy firm understands the demand elasticities relating to prices in the markets within which it operates.

    If the firm is a monopolist they will maximise their profit by set price where marginal revenue equals marginal cost. Although great for the monopolist, the overall welfare of society gets hammered in this situation.

    Governments are also monopolists as far as tax is concerned, not of markets, but the whole economy. The same hammering of social welfare will take place as HMG tries to balance its books by setting marginal revenue (tax) to marginal cost (economic inefficiency).

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  • The Baldman says:

    No new news to most of us. We knew Gordans miracle would end up in a total mess. Lets go to the IMF now for a loan and ramp us interest rates and taxes! House prices are possibly lost their relevance when compared to the overall economic disaster Gordan has created.

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  • I remember the Irish Government raising alcohol taxes in the late 70s. The pubs were empty the following year and their revenue from
    alcohol sales dropped significantly. Yes you can always raise taxes but at some point people will not pay or avoid them. If its income tax
    people will become more self employed and deduct everything, if its sales tax they will stop buying. Not everyone, but enough to make a difference. At a certain point the black market or underground economy will explode.Cash with no records will expand rapidly for services goods etc.Once that starts to expand it becomes more and more difficult to return to the previous status .People once they take the first step to the dark side rarely return to the tax fold. Fear stops most people from cheating too much, but when its becomes necessary to survive and you overcome that fear of the government it becomes normal to lie.If they did not catch me last year they probably will not next year.
    The government eventually will not have enough personnel to control tax avoidance.They can deal with a few tax cheats but if a good percentage of the population is involved they have no hope. Sure they can levy a fine here and there but the better cheats will allow for that and have assets that are difficult to confiscate.
    Thats the future when you confiscate everything by raising taxes or interest rates in the case of the banks etc people will all of a sudden not cooperate.
    Its closer than most people think. If the government has to raise interest rates to fund its deficit the economy,heir revenue from taxes will dissapear. Its dropping drastically now with low rates.

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