Respuesta :
When government increases the level of government transfers, it have to mobilize additional resources. This mobilization of additional resources induces the government to raise taxes or borrow more. Higher borrowing, at present, also translates in to higher taxes albeit in future time period.
So, government has to resort to tax increase in order to increase the level of government transfer.
However, such higher taxes induce the workers to work less as they realize that their productive endeavors in face of tax increase is not culminating in enough rewards.
Secondly, as taxes rise, people resort to ways that can help them in avoiding higher taxes. This means instead of devoting resources for productive uses they utilize them for unproductive or rent-seeking (tax avoidance) activities.
Both these consequences of higher taxes results in lower production and shrinking of economic pie.
Hence the answers are 1) Higher taxes may be necessary to finance increased transfer payments, leading to a reduction in hours worked because of a decrease in the reward for productive activity. and 2) Greater transfer activity diverts productive resources into rent-seeking activity.
In an economy, people try to reduce their tax liability to the extent it is possible, so they try to devote their time and energy to find out the ways to reduce their tax liability. Moreover, if they are not able to reduce their tax liability then they think of how they can fit into the category of people who qualify for those transfer payments and thus resulting in the reduction of the economic pie.
Further Explanation:
Transfer payments might reduce the size of the economic pie in different ways
People may devote more time and energy to avoidance of taxes necessary to finance increased transfer payments:
It is in the nature of human beings to pay less and gain more, but sometimes that cannot be good for an economy. When the government tries to redistribute its income from taxes by way of transfer payments, people of the economy think that “why their hard-earned money is going to be transferred to someone else by way of taxes.” This is the main reason why people try to find out the loopholes in the laws of income tax so that they can avoid paying tax and devotes most of their time in finding these loopholes in the economy. This avoidance of tax can lead to the great plunge in the economic pie.
Increased transfer payments may divert productive resources into producing more goods and services:
An increase in the transfer payments of a country may lead to an increase in the rent-seeking activities of the individuals. In other words, people try to find out how they can fit into that segment of individuals who are going to gain from these transfer payments as it will be the only way to get their money back from the government. Since tax avoidance is illegal in every country, which leads the people of an economy to this way of getting their money back and some people do gets fit into this segment of the economy and eventually result in decline in the economic wealth.
Higher taxes may be necessary to finance increased transfer payments, leading to a reduction in hours worked because of a decrease in the reward for productive activity:
It is true that if not in the present then in future there will be a need for increased taxes to funds those transfer payments. Since the government is going to charge more from the remuneration earned by people by providing goods and services which will have an effect of negative externalities in an economy. Due to the negative externalities, people will try to deliver lesser goods and services as compared to when they were delivering more thus resulting in decreased production of goods and services in an economy. This is called “the deadweight loss” which means resulting in the loss of consumer and producer surplus. For this benefit-cost analysis is done to ensure that the social welfare gains from the particular transfer payments exceed the deadweight loss of taxes required to fund these transfer payments.
Learn more:
1. Learn more about the demand and supply
https://brainly.com/question/8794304
2. Learn more about the size of the economic pie
https://brainly.com/question/6156396
3. Learn more about the economy of Iceland
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Answer details:
Grade: Senior School
Subject: Macro Economics
Chapter: Transfer Payments
Keywords: Economic pie, transfer payments, reduction in tax, tax avoidance, reduction in working hours, the deadweight loss, benefit cost analysis, plunged economic pie, qualification for transfer payments.
