Finance 101 -Terms
Do you think gov should tax alcohol more than food?
If yes, you believe in distortionary taxes.
Distortionary taxes:
are those that alter economic behavior by making some goods / services more expensive.
But who wouldn’t believe in them. Isn’t it common sense?
Kind of. But things don’t always play out the way we want. Ban alcohol and people will smuggle. Ban a website and ppl will still access it thru another VPN. So some argue that distortionary taxes lead to market inefficiencies.
Non-distortionary taxes:
are primarily designed to generate government revenue without significantly altering economic behavior. They are typically levied broadly across the economy, e.g., income taxes, corporate taxes, and value-added taxes (VAT), which generate revenue based on individuals’ incomes, corporate profits, or transactions.
Conclusion/analysis:
While distortionary taxes may achieve specific policy objectives, such as reducing harmful behaviors (smoking, drinking etc.) or addressing externalities (carbon tax), they can also introduce inefficiencies and unintended consequences into markets (smuggling, tax evasion etc). Non distortionary taxes make money for the gov, but must be designed carefully to minimize negative impacts on economic growth and equity.
Some like Kyle think the tax code should raise revenue with the least number of distortions. His podcast is interesting n prompted me to write this quick blog.
