What are the theories of taxation?
Answer:
Static analysis and dynamic analysis. The first assume that tax revenues will always increase as tax rates increase, while dynamic assumes that tax revenues may actually fall due to higher taxes decreasing the tax base.
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One important consideration is how much the tax will distort behavior and cause inefficiencies in the economy. This is called the "dead weight loss" of a tax.
For example, a high marginal tax on income, say 75%, will probably discourage people from working. The husband may still work, but why should his wife go to the trouble. She only gets to keep 25% of what she makes and has to pay for transportation, clothes, and lunch. She is better off staying at home.
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