More taxes kill taxes

Posted by Egidenduwa on 2025-02-21 10:13:39 |

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Impact of taxes on Business growth

Taxes generally have a negative effect on economic growth. Theoretically, they act as a disincentive on whatever is taxed. Corporate taxes reduce business investment, and indirect taxes like value added tax reduce consumption. Essentially, if your incentive to do an activity is reduced because some of that incentive is taken away in tax, you wouldn’t do as much of the activity. This is the direct, negative effect on growth that is present in most taxes. For example, as income taxes reduce people’s take-home pay, they have less to spend. If the government doesn’t spend those tax revenues (via public services, social security payments, etc.) and instead uses them to pay down public debt. This is the direct same situation in Burundi. Citizens continue paying taxes but for everything needed in country they are asked contribution.

So, can taxes support growth at all? Yes, but the effect is indirect.

Two highlights:

First, taxes enable governments to spend more. They can spend it in growth-enhancing areas although this does depend on whether governments invest in areas that contribute more to economic growth than the areas from which the tax was taken.

Second, taxes can create a better business environment if improved public finances lead to lower economic risk and lower expected future interest rates. Then again, a raft of factors can influence this: it is entirely plausible that improved public finances under a government without a long-term plan can create a worse business environment than worse public finances but with a long-term plan to improve productivity.

The question is: What’s important is where the tax comes from and how we leverage the advantages while minimizing the disadvantages. Normally, these taxes should help in anything needed in the country because it is called retrospective development. The development from the citizen and coming back to the citizen. But it is not the case.

Which taxes have the biggest impact on growth?

Raising the income tax rate has by far the least negative effect on little business men. In the long run, the simulation shows that the economy pretty much returns to baseline levels, with a slight increase in potential output. The beginners in the business, they begin with little capital and they are hindered by these frequently taxes.

Think about corporate taxes

 A rise in the corporation tax rate leads to a severe and negative initial fall in business. Potential output also decreases. This leads to lower productivity, higher inflationary pressures and deteriorating economic circumstances in the long run and this is what is happening in Burundi. If the entrepreneurs don`t fail this affect also the citizens in the prices. Indirect taxes operate largely through the price channel, increasing the prices of goods. By artificially raising prices, demand is curtailed.

What can be done to reduce tax rises?

If governments plan to raise taxes, there are two main ways to reduce the negative effects. The first way is to reinvest the tax revenue directly for example, in green infrastructure, education, public solidarity, or research. The second way is through an increase in business confidence (assumed to come about if better public finances lead to expectations of increased economic stability).This should be the good way for accountability and prognosis of the country budget.

For the young entrepreneurs

They begin with little capital and they are charged the taxes every three months and daily taxes, this can’t permit them the good advancement in their business. What is the value of those taxes every three months? What is the value of those taxes every day? They aren`t all for the country? They should be realized from all this charge of taxes.

Conclusion

To summarize, the best way for governments to raise revenue would be through income taxes targeting the earners who are least likely to spend or work less as a result. If governments direct the revenue raised from this tax towards productive investment, while assuring financial markets of a clear, credible plan for future economic stability, the effect on economic growth can be maximized.

Beyond this, governments should also ensure that carbon taxes develop to meet net-zero targets and explore land value taxes as an alternative fiscal instrument. Taxation and growth are closely connected. A nuanced policy approach is vital.