The paper 'Government Spending in a Simple Model of Endogenous Growth' is a great example of a Macro and Microeconomics Case Study. Economists have been trying to come up with an optimal taxation system that can achieve the goal of maximizing social welfare and that of economic development. For years, tax policy has depended on the theory that there is a trade-off between equity and efficiency in the taxation system and each has to be sacrificed in the place of the other. Efficiency and equity of taxation are two concepts that are at odds with each other.
Efficiency in the context of taxes refers to the maximization of the total size of the economic pie. On the other hand, equity is defined as fairness or equality in sharing the economic pie. Equity hopes to distribute the benefits of taxation fairly across the population. In this essay, literature that supports the idea of a trade-off between equity and efficiency in taxation is analyzed. Secondly, a new way of thinking about taxation that delinks equity from efficiency in taxation is also analyzed. One of the key points to support the equity efficiency trade-off theory is that there are substantial costs incurred in redistributing tax revenue.
The redistributing agent incurs administration costs which make the taxation system less efficient. Okun (1985) argues that taking tax income from the rich and redistributing it to the poor is like transferring water using a leaky bucket. Let take the instance of income tax one of the most popular methods of wealth redistribution. HM Revenue and Customs have the responsibility of collecting income tax from citizens. HM Revenue incurs substantial administration costs in running its operations.
It is generally agreed that taxation bodies incur huge administration costs in a bid to comply with existing tax laws. In recent years, the effectiveness of the taxation structure in economies has become a great concern to governments (Hsu, Anen, and Quartz, 2008). Evidence from government records shows that administrative costs run in excess of 1 percent of the tax revenue collected or are sometimes substantially higher than 1 percent. Some of the administrative inputs needed by faction departments include materials, personnel, information, procedures, and laws.
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