Friday, April 11, 2008

Supply side economics : An overview (II)

It is true that lower taxes reduces the incentives(benefit) of not paying them, which imply that tax payers have to pay higher cost for not paying lower taxes. As a result tax revenues increases because of better tax compliance. However, the question whether lower taxes really means increases in tax revenue , also becomes a practical matter concerning the management technology , the IRS or for this matter any tax authority, apply to the process of tax revenue collection. The better the technology support on management, applied to collect taxes, the higher should be tax revenues. Neither Laffer, nor Paap and Takats paper (IMF WP 8/07), give too much importance to such issue(technology and tax collection). In fact Paap´ s paper, works on the assumption that there is limited enforcement capacity , and auditing for tax payers randomly determined .-
The conclusion of that paper though, make clear the point about the ability of tax authorities to get tax payers on line, such that those cases with weak tax collection system, might benefit more from tax cuts than those with strong tax collection system. But there is no mention about technology applied on tax collection, let say throughout a transaction networks, which automatically get the proper tax with each transaction.-
The question about the real impact of lower taxes on economic growth, and the expected higher productivity level arising from private uses of resources , will also depend on the institutional framework ,which means that tax cut , requires complementary policies to get the best of its effect on welfare.-
Tax cuts might have a stronger impact on economic growth, when they are complemented with better incentives to tax exemption , better service for tax payers (customer profit approach ), and better allocation decisions for fewer resources , which should be focused on those areas with the stronger impact on growth.Tax cuts on its own, is just the minimum of the economic growth- incentives , equation.-