The Disadvantages Of Taxation

Taxation is one of the most hotly contested topics in any political establishment. There is always a group of people who feel that the government s levying too much taxes on its people, while there is another group which feels that the government is levying too little tax and the amount of taxes should actually be reduced. However, in this article, we are not going to discuss about determining the best taxation levels, but we are going to look at some of the disadvantages of taxation that you should pay attention to.

Reduction In Aggregate Demand

The first disadvantage that is associated with taxation is the fact that it usually causes a reduction in the aggregate demand of the economy. This means that you can find a situation whereby as the government taxes the citizens and the residents of a particular country, the money that is received by the government ends up used by the government on foreign important, when the money would have been used by the people to buy their day to day items.

Misallocation Of Resources

Another reason why the government should not tax its citizens is because of the fact that taxation usually causes misallocation of resources, where the resources are being allocated from the efficient place, to the place that is not efficient. A good example is when the income of the taxpayer would have been used for the purchase of items that are useful to him, but then the government uses this money for the purchase of things that are not economically efficient. In such a case the government creates a situation were the resources are not being allocated to their best places.

Discourages Investments

The other problem that is associated with taxation is the fact that it goes along way in discouraging investment and production,. You will find that there are some people who are taxed at very high rates. Due to the fact that most governments employ progressive taxes, the more someone earns, the more he is taxed. For this reason, such a person will be discouraged from investing more and working harder because more and more of his money will be going to the government instead of his pockets.

These three things are important when considering the disadvantages of and the limitations that are cased by taxation. However, this does not mean that taxation is bad in itself. It only means that it has its own disadvantages that should be looked at.

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