How Effective Is Taxation as an Influence on Economic Behavior? Essay

A tax, which is a word derived from a Latin word taxo is used to refer to a compulsory or obligatory financial charge or any other type of levy that citizens have to pay. People paying tax are called the taxpayers, who are mandated by the government to pay taxes on the products and services they use. Since the obligation to pay tax is in the law, every citizen pays tax either directly or indirectly. All over the world, governments and their equivalents have used the principle of revenue collection through taxes as a way of soliciting funds for their functions including the expenditure needs for infrastructures, scientific research, military requirements, arts and culture, public works, public insurance, collection and dissemination of data, distribution, and government operations. Most countries institute tax systems geared towards paying for common, public, and agreed on national needs as well as various government functions (Allen, Vayanos & Vives, 2014). To achieve this, some nations levy flat-rate taxation in terms of percentages on annual, personal income, others impose almost no tax, while others base their taxes on annual income amounts. It is important to understand how taxation influences government economy and how various types of tax such as sin tax, gasoline excise tax, and luxury tax influence economic behavior.

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One of the ways that governments influence the economic behavior of an individual through the use of tax by imposing a sin tax on the taxpayers. The main purpose most governments levy taxes is to raise money or revenue to be used in funding the various governing needs. Another reason is to alter the prices of services and goods as a way of influencing their demand. Sin taxes are levied on specific goods, which are deemed as harmful to society. Some of the goods subject to sin tax in the United States of America and many other countries include candies, tobacco, soft drinks, alcohol, sugar, coffee, fast foods, pornography, and gambling. Increasing taxation on the named products is meant to reduce the amounts people buy, and consequently their effects in the society (Ding, Veeman & Adamowicz, 2013). According to economic theory, increased taxes on goods and services lead to more revenue for the government, hence it is argued that the governments use sin tax strategy to both protect the public from harm as well as increase its revenues. Despite the fact that the cost of cigarette increases because of the increases on taxes, many people still purchase the product in the United States of America. In fact, the country still registers approximately 440,000 deaths from tobacco use annually (Sloman & Garratt, 2016). This number could be much higher if higher taxes were not imposed on tobacco. It could even be worse if no taxes were imposed on tobacco at all. Due to the raised costs of the harmful products because of the raised taxes, fewer people stop buying them or buy less of them as they channel the money they could have used in purchasing them to other personal and family effects (Mendolicchio, Paolini & Pietra, 2013). In most economies, the embers of the public would rather support sin tax as opposed to some of the common goods that they need for their daily survival in case the government needs to raise more revenue from taxes.

Secondly, gasoline tax excise is a vital policy tool used in controlling the externalities related to automobile use in a country. The policy tool is also used by governments to regulate the prices of gasoline as a way of raising government revenues, reducing the way people depend on the oil products and control the consumption of oil products in general. Governments must think of the most effective way of implementing the gasoline tax excise policy to help influence the automobile use (Li, Linn & Muehlegger, 2014). For instance, increasing the taxes on gasoline with lead to a reduction in the amount people buy to use that way people reduce their dependency on gasoline for transportation, which results in reduced air pollution. Some of the reasons gasoline use needs to be controlled by the government include the fact that it leads to local air pollution, traffic accidents, congestion on the roads, and carbon dioxide emission. Besides correcting the automobile use externalities, governments regulate taxes on gasoline products to reduce its consumption and consequently, an overreliance on imported gasoline. Some of the sensitive economic issues of the government of United States include the constraints on foreign policy, geopolitical costs, and military costs; such factors are taken into consideration when a government regulates gasoline process to influence the way people buy them (Mendolicchio, Paolini & Pietra, 2013). As most of the industrialized countries increase the taxes on gasoline as a way of reducing consumption, the United States of America relies on CAFE (Corporate Average, Fuel Economy) standards. The standards were enacted during the oil crisis of the year 1973. Upon the examination of the CAFE, research reveals that taxes on gasoline is more cost-effective is achieving targeted fuel reduction. A little increase gasoline taxes results into a bigger reduction on the fuel consumption (Sloman & Garratt, 2016). For instance, in the United States of America, increasing the tax on gasoline by as little as 5 cents results into a 1.3 percent reduction in gasoline consumption. On the other hand, a reduction in the taxes on gases results in a greater increase in consumption as compared to the decrease resulting from the increase in tax. For instance, when the tax on gasoline reduces by 5 cents, the increase in percentage consumption may be up to 7.8.

Another important excise tax designed to influence consumer behavior is the taxes on luxury goods. This tax influence targets individuals and companies that spend money on luxury products that they can do without or with cheaper alternatives. Such taxes require people who invest in luxurious products such as paying more for food and buying luxurious cars (Tiezzi, 2017). One way of achieving resource distribution is by taking money from the rich and redistributing it to everyone else in the country. One way that a government can achieve this is by increasing taxes on luxury goods, which can only be bought by the rich people and the revenue raised from that is used to dispense services to everyone in the country (Onu & Oats, 2016). The luxury tax is considered progressive tax, which takes more money from rich people than it does from the poor people (Ding, Veeman & Adamowicz, 2013). Taxes on luxury goods is based on the fact that increases in the cost of luxury goods do not reduce their demand as significantly the increase in the cost of gasoline. The rich will still buy the expensive cars and eat from the hotels that overprice their foods regardless of the increase in tax. On the other hand, even if the government reduce the tax on the luxury goods, the poor may still not buy them, and the rich may stop buying them simply because they are of low value (Koenig & Wagener, 2013). For instance, in countries such as Canada, celebrity and the wealthy from the corporate society drive overpriced cars however much the government increase taxes on them. In fact, in most cases, celebrities openly quote the cost of their cars as a way of encouraging others to buy them (Hennigs & Kilian, 2016). The pride in having such cars lie in their cost as the government depends on such mindset to mine more money from the rich and useful in providing for the needs of the poor.

Governments influence the market behaviors by regulating taxes; marketers also observe taxations on their products and services in devising the price related ways of influencing buyers. It is, therefore, true to say that taxation influences the economic behavior at individual levels as well as the national level in a country. Cross-border tax policies also influence the economic behaviors at multinational levels (Hennigs & Kilian, 2016). Tax may not only be paid in terms of money, in some cases, but it is also paid in the form of labor, is that both capital and labor are great influencers of the economy, it is, therefore, important to look at taxation as the greatest influencer of the economic behavior in many perspectives. Various counties impose a tax in a variety of ways (Farooqi, 2017). The amounts of taxes versus collected versus the government expenditure influences the economic behavior of the government. For instance, when the expenditures by a government depending on taxes is more than the tax revenue, then it starts accumulating debts. In that case, the government may decide to use a portion of the taxes collected to service the past debts so that new debts can be awarded. On the other hand, the government can use the revenues collected in terms of tax to fund some of the public services and welfare so that people can be empowered as a way of preparing them for maximization of tax they will give to help the government conduct its duties effectively. In that case, it is said that the government gives services to the people as it expects a return in the form of taxes (Farooqi, 2017). According to economic theory, taxes cause economic effects as it influences the purchasing power by the members of the public. It also causes a substitution effect, for instance, in the case of the taxed versus untaxed goods.

Conclusion

In summary, some of the public services that the government's fund includes unemployment benefits, education systems, public transportation, and pensions for the elderly among others. Government investments in the energy sector, waste management systems and water are also important public utilities that lead to a positive response from the members of the public in terms of tax payment. In other words, many governments use service delivery as leverage in encouraging the members of the public to pay more taxes that are used in improving the economy of the country. The service delivery can also only be realized by such countries if the members of the public pay their taxes promptly and effectively. Some of the taxes that the governments use to influence customer behavior include sin tax, gasoline excise tax, and luxury tax. It is important that the governments vary taxes on products and services as a way of improving the economy for the betterment of all citizens in the country.

References

Allen, F., Vayanos, D., & Vives, X. (2014). Introduction to financial economics. Journal of Economic Theory, 149, 1-14. doi: 10.1016/j.jet.2013.10.007

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Farooqi, R. (2017). The Art of Branded Luxury Indian Consumers Buying Behaviour. SSRN Electronic Journal. doi: 10.2139/ssrn.2959886

Hennigs, N., & Kilian, T. (2016). Mirror, mirror on the wall: consumer vanity and luxury consumption. Luxury Research J., 1(2), 150. doi: 10.1504/lrj.2016.078121

Koenig, T., & Wagener, A. (2013). Tax structure and government expenditures with tax equity concerns. Journal of Economic Behavior & Organization, 90, 137-153. doi: 10.1016/j.jebo.2012.04.019

Li, S., Linn, J., & Muehlegger, E. (2014). Gasoline Taxes and Consumer Behavior. American Economic Journal: Economic Policy, 6(4), 302-342. doi: 10.1257/pol.6.4.302

Lin Lawell, C. (2017). Global gasoline prices: The need to raise gasoline taxes. Nature Energy, 2(1). doi: 10.1038/nenergy.2016.206

Mendolicchio, C., Paolini, D., & Pietra, T. (2013). Income Taxes, Subsidies to Education, and Investments in Human Capital....