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Taxes matter: they have an effect not only on who bears the burden of
paying for government expenditures but also on the level of economic
activity and incomes in a country. Moreover, tax policy reflects social
concerns as well as economic choices, such as how the burden of tax is
spread over income classes, and how taxes are used to influence personal
choices (about everything from saving, labour supply, and investment to
the consumption of alcoholic beverages and the preservation of
traditional activities, such as farming). Taxes have a powerful effect
on the behaviour of individuals. Indeed, taxation is perhaps the
principal means by which modern governments influence the lives and
economic well-being of their citizens; it is therefore a central feature
in political and economic debate.
The study of tax policy reflects some notable difficulties. It is
necessary to determine the short- and long-term economic effects of
different tax alternatives in order to assess which system will maximize
economic well-being, output, and incomes. But because the taxation
system is used for many non-economic purposes, it is also necessary to
consider how the system meets citizens’ preferences about non-tax issues
(such as health and education) and how much these preferences cost.
Further, the tax system itself is used to distribute social welfare
subsidies and grants. And, above all, in a democracy the tax system must
be fair and be seen to be fair.
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