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Introduction
Taxation as a system of governmentally imposed financial charges is a subject of dispute among economists in the modern world. Different theories of capital structures attribute to taxes different roles in the economy, either as a positive regulative factor or as a breaking mechanism of the economic growth. However, in modern rapidly changing economic conditions the non-tax countries have proven to the world, that it is possible to function efficiently without imposing any taxation.
Main body
The initial purpose of the taxation system, of course, was for the government to levy a fee for its services. Nevertheless, as the structure of the state systems and financial mechanisms developed, the principles of taxation became more complicated. Nowadays, many countries impose taxes on both individuals and legal entities and have complex administrative regulations, concerning the amounts and types of taxes. However, the main purpose of levying taxes today is the redistributive function of the government. Some taxes and cash transfers, like income tax, are more efficient for the economy than others, as provide a better redistributive effect (Joumard 37). As for the corporation and business, Graham suggests, that often ‘firms choose organizational form, based on relative corporate and personal tax rates’ (1121). That means, that tax influences decision-making in business, and thus, may slow down some developments.
The property taxes are also designed to control the ownership by imposing taxes on land, immovable property, inheritance, etc. Thus, in some ways individual shares the right of ownership with the state. Presumably, such an approach can be legitimate and acceptable as long as it is ‘a contribution to the framework, within all the individuals live’ (Murphy 42). However, being inside of that framework it is impossible to define the benefit.
Perhaps, the most controversial set of economic theories of the last century is the theories of capital structure, aiming at finding the balance between taxation, debt and leverage in the economy, for example, by ‘balancing tax advantage against bankruptcy costs’ (Bradley 857). The research for the majority of the tax models of the capital structure was conducted in a western economic environment with rather complicated systems of taxation. During the Great Recession, non-tax counties received a lot of attention from economists, since they were less affected by the crisis, despite the predictions of the optimal capital structure theories (Ayyash 30). As one of the reasons for such phenomenon, researchers see the fact that complex taxation systems discourage foreign investment. Martina Lawless claims that ‘for multinational firms that are making a decision about where to locate, the costs associated with complicated tax code might offset…attractions of a lower tax rate’ (1). Thus, some taxation systems show themselves not dynamic enough for the modern economic world. Different libertarian and/or non-tax economies are more encouraging for business. However, if every single country reduced or banned taxes, at first, it would probably, stimulate the small business but in a long run, it would devalue international cooperation and partnership. Besides, it should be noted, that it would be impossible for all the countries to adapt to the same economical model. In many countries, there is no alternative option to replace the tax system.
Conclusion
Although taxation as a means of redistribution in society aims at the benefit for the citizens, it has negative traits, such as issues of public control of the taxes, complications for the free business development and possible discouraging of the international investments.
References
Ayyash, Nehmat, Reza H. Chowdhury, and Timothy T. Campbell. “Relevance of Capital Structure Theories in a Tax-Exempted Economy: Evidence from the United Arab Emirates.” The Global Journal of Finance and Economics 10.1 (2013): 25-40. Print.
Bradley, Michael, Gregg Jarrell, and E. Han Kim. “On the Existence of an Optimal Capital Structure: Theory and Evidence.” The Journal of Finance 39.3 (1984): 857–878. Print.
Graham, John R. “Taxes and Corporate Finance: A Review.” The Review of Financial Studies 16.4 (2003): 1075-129. Print.
Joumard, Isabelle, Mauro Pisu, and Debbie Bloch. “Tackling Income Inequality: The Role of Taxes and Transfers.” OECD Journal: Economic Studies 2.1 (2013): 37–70. Print.
Lawless, Martina. “Do Complicated Tax Systems Prevent Foreign Direct Investment?” Economica 80.317 (2013): 1-22. Print.
Murphy, Liam B., and Thomas Nagel. The Myth of Ownership: Taxes and Justice. Oxford: Oxford UP, 2002. Print.
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