The Big Picture (putting it all together)

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My question would be..why can't they reduce spending? Did we REALLY NEED that new space shuttle? Do we REALLY NEED to spend trillions on war?

Friday, April 23, 2010
Why the Valued Added Tax Is Coming On Top of the Income Tax
By Uwe E. Reinhardt


There are plenty of reasons to shudder at the idea of higher taxes. There are also plenty of reasons to expect them nonetheless.

It is understandable that everyone dislikes paying taxes, because they are a forced personal outlay for things one does not necessarily appreciate.

Economists, for their part, teach their students that in addition to this understandable opposition to taxes, taxes also tend to change economic behavior, mainly in undesirable directions.

A tax on wages and salaries, for example, lowers the net reward to supplying hours of work to the economy. Sometimes, to be cute, economics professors style that tax as a “subsidy for consuming leisure,” just to drive home the point.


With few exceptions all other taxes have some effect on economic behavior as well. The main exceptions are (1) a so-called per capita head tax, which almost never prompts people to cut off their heads to avoid the tax, and (2) a tax on unimproved land, because that land simply is there. The improvements human make on land, however, can be affected by taxation.

Occasionally a tax can help curb behavior society may wish to curtail. A sales tax on tobacco, for example, is known to reduce smoking, especially among teenagers. A tax on the output from polluting production can induce firms to clean up their production processes, thus curbing pollution, or simply to reduce production. Taxes designed to curtail undesirable behavior are known in the vernacular as “sin taxes.”

But for the most part, taxes tend to curtail some desirable economic behavior, be it working or investing in productive capital, or trading for mutual advantage. Taxes then entail what economists call a “deadweight loss.”

By “deadweight loss” economists have in mind the fact that when a tax reduces desirable economic behavior — e.g., the building of boats, or producing some other valued output — the value of the output to society thus lost usually exceeds the value of the resources that are no longer sacrificed to produce that lost output.


http://www.economicpolicyjournal.com/2010/04/why-valued-added-tax-will-be-added-in.html