How Can Taxes Affect You?

How Can Taxes Affect You?

Taxes affect us in different ways. The most apparent being financially. Our income, spending pattern, investment come with taxes which have implications for our finances. For example, if property tax rates are high, people would be discouraged from taking up mortgages. Likewise, if tax rates for small businesses are low, it would encourage more people to go into entrepreneurship.  

Even though we know that taxes are inevitable, we tend to overlook its impact when making life plans. Whenever we pay attention to taxes, the focus is on how it affects our pockets. We tend to concentrate on how it affects our purchasing power and ability to save.

Tax affects behaviour and life choices

Yet the effects of taxation goes beyond financial dimensions. Many of us are oblivious about how taxes can alter our behaviour and Influence the choices we make. Taxes can affect the type of products we consume, investments to pursue, family size or even property we should own. 

For example, if the government provides tax deductions for children, this would encourage people to have more children. Similarly, if the government raises the rate of its luxury tax, it would discourage people from owning luxury items such as yachts, beach houses, fur coats etc. 

Taxes also determine what type of investment option we would want to pursue. For example, an options trader may opt for a lower expiration date on his option because it attracts a lower tax rate. Taxes can also lower not only our purchasing power but our investable income. Higher taxes means we would have less money to buy things or invest.

Taxes also affect our political system and how developed our societies would be. Taxation has been a crux of political debates and manifestations. An individual’s view of taxation sometimes determines his political alliance and ideology. In the United States, Democrats like to increase the taxes on the rich and ease the burden on the people. However, Republicans, on the other hand, favour easier tax regimes on the rich. 

Tax and public policy

Governments have been known to use taxes to induce the desired behaviour they want among their citizens. Taxation has been a means through which the government can achieve its public policy plans. For example, if the government is concerned about the burden on its public healthcare system, it may decide to promote healthier living as a matter of public policy. Using taxation as a tool, it can increase the tax on cigarettes and alcohol to dissuade people from consuming these similarly if the government wants to promote liquidity it can lower tax rates on consumables to encourage us to spend more. 

Likewise, a government may decide to promote environmental awareness and reduce urban pollution in its region. To achieve this, it could increase excises on petrol or gas which may help reduce the sale of fuel because people would have less incentive to use their cars, thereby reducing urban pollution and ensuring a cleaner environment.

One reason which has been preferred for the effect of taxation on our behaviour is tied to our human instinct. We would want to avoid anything that makes us spend more money, including taxes. As such, items which attract lower taxes are generally preferred over those that have high taxation rates. The premise is that individuals tend to factor the tax costs in any activity they engage in, and adjust their behaviour accordingly.

Direct taxes hit us most

Direct taxes have a more substantial impact on your financial behaviour than indirect taxes. This is because we feel the burden of the tax on your finances immediately, unlike in indirect taxes which are more subtle and less noticeable. Direct taxes such as sin tax and luxury tax can be used as deterrents against certain consumer behaviours. 

We react in different ways to tax

Using taxation as a fulcrum to swing human behaviour is not as easy as it sounds. This is because as individuals, we react to taxes differently. We react based on our income, social class, financial knowledge,  and even due to the increase or decrease of tax rate. 

For example, an increase in luxury tax can make certain products and services inaccessible, which could make them become more desirable. While it may deter some from owning such property, it may also make such items to become associated with wealth and prestige and seen as a symbol of one’s social status. 

The basic premise is that most taxpayers would do whatever it takes to reduce their tax burden. These financial adjustments led to changes in behaviour. As such, when we view tax, we should go beyond the monetary implications and look at the broader behavioural and social changes which taxation has on us. These changes are the ones that have a long-term effect on our life. 

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