Taxation transfers resources from the private sector, where they are used in accordance
with individual preferences, to the government, where they are used in accordance with
political preferences. A good text will make this point clear, and proceed to discuss
three important issues in the economics of taxation.
The incidence of taxation. Taxes are frequently levied on an entity that will not
bear the ultimate burden of the taxes. "Who really pays this tax?" is an
important question, one that also helps the student to "think like an
Tax incentives and disincentives. Taxes alter the payoff for taking or not taking
certain actions. Many times taxation can make activities that are profitableand
beneficialno longer profitable. The student should learn to consider the long-term
impact of tax changes after individuals and businesses have adjusted to them.
The cost of taxation. Taxes do not collect themselves. And tax avoidance costs
billions of dollars each year. Economic texts should explain to students that the economic
resources devoted to tax collectionas well as those devoted to tax
avoidanceare substantial, and not available for other purposes.