EFFECTS OF TAXATION

EFFECTS OF TAXATION

The effects of taxation is conceived to cover all the changes in the economy resulting from the imposition of tax. Generally, the presence of tax distorts the patterns of production, consumption, investment and employment thus giving validity to what HARPER (1963:213) calls the concepts of “general fiscal rationality”.

The Effects of Taxation are as follows:

a. INCENTIVE TO INVEST:- Heavy taxes may reduce the preventive to invest especially if the tax heavily on savings and profits. All the discrimination features of the companies income tax stems from the fact that company’s net income is the base.

By definition of tax, all unincorporated activities are exempted and even within the corporate sector of the economy. The tax falls more heavily on activities with low rations of debt and it is a deductible expense.

The consequence of this discrimination is the distortion of the economic structure favoring non-corporate sector, there is distortion favoring those activities which can readily be financed in large measure by dealt capital over those that cannot.

However, the Nigerian companies income tax attempts to attract investment in certain preferred sectors by giving tax incentive to firms engaged in such activities.

b. INFLATION &TAXATION:– taxation as a fiscal tool available to the government can be used to fight inflation, deflation, stage, flation and other undesirable trends.

For example, an increase in the rate of both companies and personal income taxes during inflationary period can reduce expenditure from the private sector thereby reducing pressure on the market and curtailing inflation.

The chief of inflation on taxation as noted by EREASER (1980:116) is to change and often increase its filed in money terms without the need to adjust tax.

c. INCENTIVES WORK:- Heavy direct tax may reduce incentive to work if the amount paid too much, the tax payer quite the job or at least work less.

A highly progressive and steep tax structure may serve as demonization from working harder once it has reached a certain income level because and additional increase income after that level will more proportionality increase tax of the individuals.

d. IT REDUCES PRODUCTION: if exercise duties are high, production will be adversely affected.

e. IT WILL ALTER DEMAND SUPPLY:– When few goods are produced and their prices high as a result of indirect taxes demand and supply will be low.

f. CAUSES SCARCITY OF GOODS:– Taxation reduces the quality of goods produced locally an imported thereby causing scarcity of goods.