How Do Taxes and Subsidies Influence Enterprise?

Abstract

The traditional approach to taxation began with Adam Smith’s wise advice that the amount levied in taxation should be fair, known, convenient to pay and cheap to collect. The modern approach stresses that the type of taxation, the amount levied, and the government expenditure which it is used to finance, have allocative, distributional and stabilising effects. Taxation and government expenditure are used to allocate public goods such as law and order and defence, and quasi-public goods such as education and health care, compensating for what would otherwise be market failure. Taxation and government expenditure may also have the effect of redistributing income from the rich to the poor, or vice versa, and of stabilising the economy according to Keynesian theories of economic management.

We need to strengthen incentives by allowing people to keep more of what they earn, so that hard work, talent and ability are properly rewarded.

(Sir Geoffrey Howe, Budget Speech, 12 June 1979)

Reductions in taxation motivate new business and improve incentives at work. They are the principal engine of the enterprise culture, on which our future prosperity and employment opportunities depend.

(Nigel Lawson, Budget Speech, 18 March 1983)