One of the most commonly discussed issues in economics is how tax rates relate to economic growth. Advocates of tax cuts claim that a reduction in the tax rate will lead to increased economic growth and prosperity. Others claim that if we reduce taxes, almost all of the benefits will go to the rich, as those are the ones who pay the most taxes. Specially, we truly care about how tax rates can lead to the changes in labor supply and aggregate demand (AD). What does economic theory suggest about the relationship between labor supply, AD and taxation? Our limitation is only in our country- Vietnam. The Law on Personal Income Tax, approved by Vietnam National Assembly XII on 21 November 2007, officially coming into effect on 1st, January 2009, marked the great effort of the Government in perfecting its personal income regulation policy Now 2012, we want to know more about the affects of this tax to labor supply and AD in VietNam. We realize that income tax is a very hot, real and controversial issue in Vietnam. Our aims are to provide more information about the relationship between income tax and the labor supply, AD in Vietnam, to know how changes in income tax can lead to the changes in labor supply, AD. At the moment, in VietNam economic recent situation, the percentage tax on person is suitable or not and which percentage can be more suitable? Our issue is: “Effects of tax income on labor supply and AD” II. Literature review
Taxation is one of the most concerned issues to economists as well as to everyone in the economy. Income tax now becomes more and more heated topic, which is being discussed and mentioned everywhere - from the Congress to the offices. There are also many assignments concerning about it. In general, the economists use 3 models when doing research to find out the relationship between the income tax and the economic growth. 1/ Model 1: A society without taxation
First suppose that we lived in a society without taxation. We will worry about how the government finances its programs later on, but for now we'll assume that they have enough money to finance all the programs we have today. If there are no taxes, then the government does not earn any income from taxation and citizens do not spend any time worrying about how to evade taxes. If someone has a wage of $10.00 an hour, then they get to keep that $10.00. If such a society were possible, we could see that people would be quite productive as any income they earn, they keep. However, in reality, there are much more troubles than we can imagine. There are some services that individuals cannot effectively provide for themselves, such as military defense, fire and police departments, roads, education, social services, and environmental protection. And the government needs money to provide these services, which comes mostly from taxes. 2/ Model 2: A society with 100% income tax rate
Taxes are now set to be 100% income. It seems that the government would earn a lot of money. However, people d would not spend any time working if they did not get anything from it. Government would earn very little income from taxation because very few people go to work for nothing. 3/ Model 3: A society with a fixed income tax rate
There are some government programs, which bring a net benefit to the economy when fully paid for by taxes. They are certain goods that society finds desirable but individuals or corporations cannot supply. With a fixed income tax rate, people now have more choices: should they work or not, how many hours they should work, how many hours they should relax…There is no denying the fact that the income tax can be not only an incentive to work but also a pressure with workers. Productivity declines as the tax rate increases, as people choose to work less. And the government tax revenue does not necessarily increase as the tax rate increases. However, there are three...
Please join StudyMode to read the full document