How do countries that have low taxes manage to support themselves? I understand their interest in bringing foreign business into the country but where does their money come from?
When tax rates are reduced, the economy’s growth rate improves and living standards increase. Lower taxes doesn't mean lower revenue for the country.
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For the most part, there are only four ways: sacrifice the welfare of citizens so there is not really a pareto improvement in welfare; maintain large debt with resulting loss of economic control; do not maintain or support basic infrastructre; and/or attract foreign business so that the lower tax percentage accumulates more total revenue dollars than the higher tax percentage.
A fundamental rule of economics is that if you tax something, you'll get less of it. On a "country" scale, that means higher taxes depress the incentive for economic activity by domestic entrepreneurs and companies. Just as importantly (and maybe more so in terms of an economy's growth), foreign companies will generally avoid investing in countries with high tax rates and instead seek to build their plants and invest their money in low-tax countries where they can keep more of the profits they earn. The theory is that low-tax countries MAY sacrifice tax revenue on each individual transaction, but that there will be so much added economic activity from both domestic and foreign investment that the total tax pool will increase. Also, economic growth usually results not just in increased profits, but in added employment and increasing property values, which provide the opportunity for more tax collection. Lower tax rates unleash a virtuous cycle of increased incentives, increased economic activity, increased employment and increased asset values---which leads to larger TOTAL tax receipts.
The clearest recent example is the Republic of Ireland. Until about 15 years ago, Ireland was a typical moribund European economy with high unemployment and zero growth. A new Government slashed tax rates to well under U.S. (much less other European) rates, and the economy was immediately kick-started. Ireland is now known as the "Celtic Tiger" because of its consistent and powerful growth. It has attracted an enormous amount of foreign investment, and is home to very large plants and divisions of multinationals like Intel, General Motors and Merck. A VERY large reason for the decision to locate in Ireland rather than in another country is the comparative tax rates; obviously Ireland benefits by collecting taxes, albeit at a lower rate, that they otherwise would not have if new businessess didn't locate there.
And, of course, domestically low tax rates have the same effect. More people take the risk of forming new businesses when taxes are low. Low tax rates also increase the potential return-on-capital of new investments, so exisiting businesses are encouraged to grow and make new investments in their companies. New and existing businesses hire more people, build more buildings, buy more machines and equipment and support real property values, all of which can be taxed in one way or another.
It is an apparent paradox that low tax rates lead to higher tax receipts, but it is completely logical if you think about it. Higher tax rates will almost NEVER raise more total taxes; the extra tax burden will just depress the level of new economic activity and discourage investment, and meanwhile the targets of the higher tax rates will likely just funnel their income into alternative tax-advantaged investments not yielding additional revenue to the taxing authority. Keep taxes low and unleash the full potential of economic growth!
an economy is not supported by income taxes! it is drained by them! our country & you can look it up was founded not allowing wage/income taxes. we flourished because all taxes were excise based. (meaning you had to buy or sell something or use something to be taxed) income taxes sucessfully do 1 thing and 1 thing only that is grow the size and control of the government. the best way to grow a country is to let people use their $ to drive the economy and then tax the sales of products and the profit of the sellers. incidentally this is the only way we will get this country back on track. get the federal government out of the peoples pocket and get politicians hands out of the pot.
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