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Lower taxes, also referred to as a tax-cut, is the reduction in taxes levied over individuals and corporations. Lower taxation has varied implications on the economy, both positive and negative. However, the immediate effects of lower taxes are a decrease in the actual income of the government and an increase in the actual income of the ordinary citizens whose taxation rates have been reduced.
The reduction in the government’s income may be lessened depending on the reaction of tax-payers. Depending on the proportion of tax-reductions, lower taxes may provide persons and corporations with motivation investments that may increase economic growth, and in turn increase the total taxable income and hence increase the government’s earnings.
Lower taxes, in most cases, stimulates economic activity especially if it is accompanied by lower government spending. Even though many people associate lower taxes with lower economic activity, it does the exact opposite; tax cuts encourage ordinary citizens to purchase more products and services, stimulating the economy and thus creating more job opportunities (Aron-Dine and Kogan, 2006).
Lower taxes ensure less money goes to the government and more of it stays in the pockets of the ordinary citizens and this has a hugely positive impact on the economy as it results in an active, free economy to boom. Therefore, lower taxes are essential to the well-being, both socially and economically, on the average Canadian citizen.
Although critics of tax cuts argue that this action reduces the government’s ability to deliver services to the ordinary citizens, studies have proved otherwise, and indeed stated that lower taxes are more beneficial to the general population. While high taxes increase the government’s ability to provide basic services, lower taxes can have a similar effect, even greater.
However, it depends on the taxpayer’s response in the way they use the additional income and also the government’s response towards a decrease in income, such as reduced spending. The notion of high tax rates is simply ridiculous. When citizens pay less taxes as a proportion of their net pay, this positively impacts the amount of money available for spending.
With increased money in their pockets, ordinary Canadians are able to purchase more products and services leading to a vibrant and free economy. It is vital to note that the money spent by the government is not theirs, it belongs to the taxpayers. Lower taxes ensure that the ordinary citizens choose how to spend their money, leading to a free economy (Larson, 2003).
Lower taxes on the manufacturing, service, and business segments of the economy allows them to spend more money on their enterprises and create more employment opportunities, this ultimately benefits the ordinary Canadian citizens. Besides, an increase in commercial activity avails more revenue to the government as a result of an increase in the amount of taxable income, and allows the government to maintain or even raise its delivery of vital social programs and health care (Halpern, 1997).
An increase in revenue also ensures that the government borrows less money and reduces the government’s debt, easens pressure on currency supply and interest rates, leading to lower interest rates, which is important to the social and economic wee being of every Canadian citizen. Tax cuts are a classic example of the saying “less is more” and any sensible government should always strive to find ways of reducing taxation and its own spending (Singleton and Slivinski, 1999).
Perhaps one of the most effective ways of enhancing innovation is to lower tax rates for both individuals and companies. When more remains in the hands of the privates sector through tax cuts, investors will have more money to support innovation. Since there is a strong link between lower taxes and economic growth, an economy that is increasingly dependent on technological advances, such as Canada’s economy, a tax system that is unfriendly to economic growth must be adjusted (National Bureau of Economic Research,1991).
Drawing from the US economy, which is currently experiencing the slowest growth rate since 1776, it is evident that expansive government programs cannot actually sustain a healthy economic growth rate. An increase in tax rates does more harm to the private sector than the positives created by government intervention.
To restore economic growth, including a healthy rate of innovation, the first step is to lower taxes so that the private sector can finance its own innovation itself (Burman, (2001). Giving the private sector the freedom to fund its own investment activities is the most reasonable solution. Innovation involves high risks and when the government funds innovation activities using taxpayer’s money, every taxpayer bears the loss if the projects fail.
However, private investors can choose their own levels of risks since their own money is on the line, therefore, they have a strong motivation to choose sensibly. In addition, as the economy expands and becomes globalized, the total amount of money required to support innovative technologies will be inexplicably huge and any government investment will be a drop in the ocean.
Innovation helps the ordinary Canadian citizen in numerous ways, such as e-commerce, medical procedures, automotive and aerospace, and in electronics and telecommunications. Therefore, in order to enhance innovation, which ultimately benefits every member of the population, the government must lower tax rates.
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The idea of high taxes is simply unacceptable. It is a counterproductive strategy that trickles down to the ordinary taxpayer. High taxes have always been found to discourage businesses from expanding or investing into other sectors of the economy, or discouraging the ordinary Canadian citizen from establishing new business ventures.
When the ordinary citizens retract from establishing new businesses and other established businesses fail to expand their operations, the economy shrinks and the common taxpayer feels the pinch. Economists have often stated tat it is the smaller businesses, and to some degree the rich, that increase the size of the national cake.
Hence, economic growth greatly depends on small businesses and not the government. First, the government does not create any money, rather, they take it from the taxpayers and spend it on various national projects. Besides, the poor creates little money and contribute minimally to the economy, therefore, the middle class, to which most Canadians belong, are left to pay most of taxes.
The rich, who are said to contribute significantly to the economy, pay their taxes on the backs of the middle class who are either employees or buyers of the products from businesses owned by the rich. When taxation rates are high, the rich tend to pass over the additional costs to the middle class. An increase in taxation may cause companies to lay off their staff leading to loss of jobs or production of shoddy products in order to counter the high tax rates.
Therefore, either way, the average Canadian citizen is hit hard by high taxation rates. High taxes also have the effect of discouraging multinational corporations from investing in a country, thus eliminating the advantages that come with these establishments, such as the availability of quality and standardized products, job opportunities, and improvement of basic infrastructure.
Lower tax rates are of great benefit to the ordinary Canadian citizen as discussed above. However, it should be noted that these tax cuts, or lower taxes, do not automatically have positive outcomes to the ordinary citizen. The success of lower tax rates partly depends on the response by the government to lower its spending. While this may be simple on paper, very few governments ever reduce their spending, even in the middle of a recession.
However, with suitable government reactions, lower taxes can result into several benefits for the ordinary taxpayer. First, lower taxes increase the amount of money available to taxpayers for spending and hence encourage ordinary citizens to purchase more products and services, stimulating the economy and thus creating more job opportunities. Besides, lower taxes ensure that the ordinary citizens choose how to spend their money, leading to a free economy.
This increase in commercial activity increases government revenue, and allows it to maintain or even raise its delivery of vital social programs and health care, which are directly accessed by the ordinary citizen. Secondly, lower taxation is important towards encouraging a culture of innovation around the country. Innovation is important in almost all sector of the economy, such as transport, healthcare, commerce, communication, entertainment, among others.
These services are accessed by the ordinary citizen in almost every facet of his/her life. Finally, high taxation rates have several negative implications to the ordinary Canadian taxpayer, for instance, high taxation rates discourage businesses from expanding or investing into other sectors of the economy, ordinary citizens also shy away from establishing new businesses. These repercussions may shrink the economy, leading to more harmful economic implications.
Aron-Dine, A., and Kogan, R. (2006). Claim That Tax Cuts “Pay For Themselves” Is Too Good To Be True. Retrieved from https://www.cbpp.org/research/claim-that-tax-cuts-pay-for-themselves-is-too-good-to-be-true?fa=view&id=165
Burman, L. (2001). Treasury’s New Distribution Presentation. Tax Notes 90 (13, March 26). 1889–94.
Halpern, P. J. (1997). Financing growth in Canada. Alberta: University of Calgary Press.
Larson, J. S. (2003). Tax cuts: issues and analyses. NY: Nova Science Publishers.
National Bureau of Economic Research. (1991). Tax policy and the economy, Volume 5. Cambridge: The MIT Press.
Singleton, S. and Slivinski, S. (1999). Capital Markets: The Importance of Lower Taxes. Retrieved from https://www.cato.org/publications/white-paper/capital-markets-importance-lower-taxes