Learning Economics: How Efficient Tax Systems Help the Economy Grow

The government needs to carefully monitor and regulate their tax system in order to maximize potential revenue, while still maintaining equality for the country's citizens. If a country's government is able to find a more efficient tax system, then they will be able to raise their total revenue at a lower cost to the people paying taxes. Additionally, the administrative burden must be taken into effect, meaning that they must factor in the opportunity cost for people having to file taxes using a complicated system.

If a country has an efficient tax system, you must have a low administrative burden. This means it is easy for people to figure out how much tax they owe the government. The current tax system in the United States is very complicated and is difficult for a lot of people understand. In fact, since it is such a complicated system, whole businesses have been created providing a service to help people file their taxes. If the system was more efficient, then the process would be much simpler. Complicated tax systems have a high opportunity cost for its citizens, meaning that people could be doing something else with their time, such as working and earning more money. However, instead they must take the time to file their taxes.

Another benefit of efficient tax systems is that they have a small amount of dead weight loss. This means that the economy is closer to equilibrium, so that both producer surplus and consumer surplus is maximized. Additionally, when the tax system is efficient, it doesn't change a person's behavior like a lot of different work incentives do.

One type of tax system is not very efficient is a system with a high marginal tax rate. This means that after a certain point, the tax on the next dollar earned is exceedingly high. This is not an efficient system because it does not provide people with any incentive to earn more money after a certain point, because they will have to pay the majority of the money earned in taxes. At certain times in history, tax rates have gotten so high that people were only make a few cents on the dollar for every dollar earned past a certain point. When this occurs, people do not have any reason to keep working, which harms the economy.

Source:

Jameson, George. Lecture: Economics. December 2, 2009