Manage Money and Income Sucessfully

It would seem that an effective tax policy is part of the foundation on which prosperity must rest. A wise state invests in security, infrastructure, education, public health, and even basic research when they are value-adding propositions. Taxes are needed to finance these investments. But it is not only the amount of taxes extracted from the economy but how they are extracted that counts, for the tax code will play an enormous role in investment decisions, and not all tax codes favor value creation.

The state also has the potential to destroy economic value through unwise expenditures. Indeed, because economics is only one criterion in developing public policy, a state will always do some of both. Let us consider some of the issues.

Broadly speaking, governments derive taxes from consumption, income, and wealth. These taxes can be leveled on individuals or on organizations. Generally, all of these sources are taxed in some way.

One of the most fundamental tax issues is whether to rely first on consumption taxes or on income and wealth taxes. The choice is of great importance to investors, who would be motivated to invest more if taxes were lighter at the income or wealth level and primarily levied at the point of consumption. Increased funds available for investment would also reduce the cost of capital and thus the ability of projects to create value.

Typical consumption taxes include sales taxes and the valueadded tax (VAT) prevalent in Europe. Consumption taxes are, however, inherently regressive, falling relatively heavily on the poor. Hence, U.S. society in effect creates incentives to consume and relative disincentives to invest by favoring personal income taxes as its primary source of tax collection.