Taxes Taxation and Recession Taxation Term Paper

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More taxes may also induce more savings and less consumption. However when project money is used inefficiently, then it only adds to the economic problems of the country. "If the resources allocated to the government are used inefficiently, or less efficiently than in private hands, economic growth is diminished and production falls. If additional tax dollars are used for a project that makes no contribution to productive capacity, and if the tax dollars raised prevent some private expenditure or investment that would have provided output and jobs in future years, growth is diminished." (Dunkelberg and Skorburg, 1991)

This is the truth about taxation and recession. Now that we have seen how taxes hurt economic activity in the country, let us see when should taxes be cut to avoid a recession. If the government can see production levels slowly going down and can connect it with lower consumption, it needs to first find out why people are consuming less? This is because there can be more than one reason for a dip in consumption.

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If it appears that people are consuming less because they have less disposable income, then a surge in income would certainly lead to higher consumption. This surge can be introduced with tax cuts and this will give a boost to economic activity. It is best to introduce tax cuts when recession seems to be there on the horizon. It doesn't necessarily have to be done after recession has set in because then there will be so many other factors working on stifling growth and simply tax cuts may not help. Thus its best to monitor consumption and production activity in the country and when it seems to drop, something must be done quickly to nip the problem in the bud.

Reference

William C. Dunkelberg and John Skorburg How Rising Tax Burdens Can Produce Recession….....

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