TAXES AND EFFICIENCY

Taxes affect both economic efficiency and the distribution of income. In recent years, the impacts on efficiency have become a principal concern of tzx policy as economists and policymakers study the effect of incentives upon individual and business behavior. In tax policy. this involves primarily the question of how people respond to different levels of marginal tax rates .

In the area of saving and investment. taxes clearly have major impacts upon economic taxes arc high in one sector. resources Kill flow into more lightly taxed areas. for example. because corporate capital is double taxed. people’s savings will flow out of the corporate sector. and into light taxed sectors like oil and gas or into vacation homes financed by tax-deductible.interest payments. If risky investments are taxed unfavorably, investors may prefer safer investments. The inefficiency comes as much from the divergence- of taxes across sectors as from the existence of high taxes.”