Taxes are vital components of any economy as they provide governments with the necessary

funds to support public services and goods. Governments collect taxes to finance essential
elements of society such as education, healthcare, emergency services, and infrastructure
development. Although it was widely agreed that taxes are fundamental to a better and steady
society, there has been a long-standing debate on whether tax cuts should be imposed or tax
increases. We often hear politicians promise they would impose tax cuts if they were to be
elected. These politicians believe that tax cuts are a stimulus to economic growth. While on
the contrary other economists and politicians believe high tax rates are necessary to fund
critical government services and promote greater economic equality.

Tax cuts are often advocated to stimulate consumer spending and increase motivation. We
can argue that reducing income tax provides individuals with more disposable income,
leading to higher spending and overall economic activity. When income taxes are lowered,
the ratio of income that used to go to pay their taxes will be lowered meaning individuals are
left with a larger income ratio for disposal. This means that as the individuals feel richer their
spending will significantly increase. That in turn will result in greater economic activity and a
larger tax revenue collected by the government. Likewise of lower corporate tax, advocates
of tax cuts argue that lower corporate tax will also encourage businesses to increase their
capital investments, hire more workers and increase productivity. This way businesses will
appear to be profitable and tax revenues will eventually increase. This does not apply only to
businesses; individuals as well will have the motivation to clock in more hours to work
overtime and earn more money as they do so. For instance, we can take the UAE’s taxation
system as a prime example, UAE’s taxation system is characterized by the absence of
personal and corporate income taxes. This unconventional approach has attracted global
enterprises and entrepreneurs seeking tax advantages created by this taxation system. Instead
of relying on income taxes, the UAE’s government generates revenue from other sectors like
tourism, real estate, and trade.

On the other side, it can be argued that tax cuts cannot guarantee increased consumer
spending. Critics of tax cuts contend that they do not necessarily guarantee increased
consumer spending. An analysis conducted by the Federal Reserve Bank of New York
Steindel; C. (2001) suggests that the impact of tax cuts on consumer spending varies. The
study concludes that consumers are more likely to boost their spending if the changes in tax
liabilities are permanent, and the magnitude of response varies. Critics also argue that tax cuts
can lead to increased government borrowing, as reduced tax revenue may create budget
deficits. Furthermore, some critics claim that tax cuts tend to benefit the wealthy more than
those with fewer resources, potentially exacerbating income inequality.

Historical insights into tax cuts are necessary to further understand the influence it has. An
examination of historical examples, such as the major tax cuts enacted in 2001, 2002, and
2003, provides valuable insights into the effects of tax cuts on the economy. The CRS Report
for Congress reveals that the economic impact of tax cuts is challenging to isolate and
accurately measure. Various macroeconomic models predict short-term economic growth
followed by long-term. reductions. However, there is no consensus among economists
regarding the most suitable model for policy simulations. Some models suggest that deficit-
financed tax cuts can hinder national savings and increase trade deficits. Overall, the effects
of tax cuts on economic performance are complex and subject to various factors.

Supporters of increased taxes argue that taxes are necessary to fund government services that
benefit society. Higher taxes can fund critical public services such as healthcare, education,
and infrastructure, which are essential for a functioning society. The advantages of having
higher taxes include free health care, free higher education, generous and stabilized welfare,
and finally equal opportunity and equality. Without these services, individuals and businesses
would not be able to function effectively. By increasing taxes on the wealthy, governments
can collect tax revenues that will be used to support the less fortunate. Governments can
achieve this by using a progressive tax rate. A progressive tax involves a tax rate that
increases as taxable income increases. It imposes a lower tax rate on low-income earners and
a higher tax rate on high-income earners. This will create an opportunity for wealth and
resources to be equitably distributed between individuals. Greater income equality and
overall life quality will be insured by a higher tax burden on the fortunate. However, it is also
relevant to point out that taxes are not the only way to raise revenue to fund these services.
The government can also raise money through other methods. As mentioned earlier UAEs
government uses alternative methods to generate revenue. These methods can also be more
efficient than taxes since collecting taxes is troublesome and tiring work. One of the other
major drawbacks of a higher tax burden is the creation of a less incentivized society. The
opposing view of a higher tax burden states that if a country’s welfare program is too
generous to its citizens, intentionally or not, individuals will start lacking the motivation to
work hard to achieve their goals. They claim that even though a higher tax burden is a way to
enhance equality, it creates a different type of unfairness by making hard-working people
carry the burden of supporting others.

Increased taxes can be used as a strategy to discourage undesirable practices by raising

prices. For example, higher taxes on tobacco, gasoline, and fatty foods can reduce
consumption of these harmful substances and control carbon emissions. However, the
demand for cigarettes is price inelastic. Since smokers are addicted, they are willing to pay
the extra amount to obtain cigarettes. Hence the effectiveness of tax increases in changing
consumer behaviours may be limited in the short term, particularly when dealing with
addictive substances... A study conducted on the association between increased taxes and
decrease consumption of cigarettes claims this to be true. This study taken from the American
Journal of Public Health P. L., & Anderson; H. A. (1992) explains the evaluation of the effect
of state cigarette tax increases on cigarette sales. They concluded that state cigarette tax
increases were directly associated with an average decline in cigarette consumption. Larger
tax increases were associated with a larger decline in consumption. Raising state cigarette
taxes appears to be an effective public health intervention that can reduce cigarette
consumption and its associated health consequences.

A comparative analysis of taxation systems and their Effects in different countries shows us a
difference in taxation systems and their advantage. Taxation systems are the cornerstone of
funding government activities and public services in countries across the globe. We delve
into the taxation systems of Ethiopia, UAE, Belgium, and the USA, exploring their unique
approaches, and comparing and examining the impact of tax cuts and increased taxes on their
economies. By analysing these diverse cases, we can gain valuable insights into the effects of
tax policies on economic growth, income distribution, and public welfare.

Ethiopia's taxation system has undergone significant reforms aimed at increasing revenue
collection and promoting economic development. Historically, the country relied heavily on
indirect taxes such as consumption-based taxes and import duties. However, recent efforts
have focused on broadening the tax base and enhancing efficiency. The introduction of a
value-added tax (VAT) system has been pivotal in modernizing Ethiopia's tax structure.

Tax cuts in Ethiopia have been employed to stimulate economic growth and attract foreign
investment. These reductions aim to create a favourable business environment, encourage
entrepreneurship, and drive job creation. However, the effectiveness of these tax cuts is often
limited by structural challenges within the tax administration system. While tax cuts may lead
to short-term economic stimulation, they must be accompanied by efforts to combat tax
evasion and improve administrative capacity to ensure long-term sustainability. Increased
taxes in Ethiopia, particularly those targeting sectors such as tobacco and alcohol, have been
introduced to promote public health and generate additional revenue. However, the impact of
these increases can vary due to the price elasticity of demand. Higher taxes on harmful
substances like tobacco may encourage consumers to reduce consumption, but success
depends on the balance between taxation levels and consumer behaviour.

As mentioned earlier UAE's unique taxation system is characterized by its absence of

personal and corporate income taxes. UAE’s tax system has contributed to its rapid economic
growth and transformation into a global economic hub. The absence of income taxes has
incentivized international investment and promoted business expansion. However, UAE's
reliance on sectors that can be sensitive to economic fluctuations, such as real estate and
tourism, exposes the economy to potential vulnerabilities during downturns. As Dubai's
economy diversifies and matures, the question of introducing income taxes may emerge. The
impact of such a change would depend on how effectively the government can balance the
attraction of foreign investment with the need to generate domestic revenue.

Belgium's taxation system is characterized by progressive income taxes, high tax rates, and
an extensive social welfare system. The country uses its tax revenue to fund comprehensive
public services, including healthcare, education, and social benefits. This approach aims to
ensure a high standard of living and equal opportunity for all citizens. Belgium’s high tax
rates have enabled the provision of robust public services and a strong social safety net.
However, there are concerns that these rates may discourage business investment and hinder
economic growth. Tax cuts have the potential to stimulate economic activity and encourage
entrepreneurship, but they must be balanced with the need to maintain essential public
services.
Increased taxes in Belgium have been used to fund its extensive social welfare programs and
address income inequality. While high taxes can lead to greater income redistribution and
social equality, policymakers must carefully consider the potential effects on economic
incentives and business competitiveness.

The United States employs a complex tax system that includes federal and state-level taxes.
Historically, tax cuts have been used as tools to stimulate economic growth, while increased
taxes have been implemented to generate revenue for public investments and address budget
deficits. Tax cuts, such as the Tax Cuts and Jobs Act of 2017, aimed to encourage domestic
investment and job creation. While proponents argue that such cuts can boost economic
activity, critics contend they may disproportionately benefit the wealthy and contribute to
income inequality. The effectiveness of tax cuts also depends on the broader economic
context, and their impact can vary across different income groups. Increased taxes in the USA
have been proposed to fund public investments, address income inequality, and reduce budget
deficits. However, such increases can also face resistance and pose challenges to economic
growth and business competitiveness.

In conclusion, examining the taxation systems of Ethiopia, UAE, Belgium, and the USA
provides valuable insights into the effects of tax cuts and increased taxes on economic
growth, income distribution, and public welfare. Each country's unique circumstances and
policy objectives contribute to the varied impacts of these tax policies. While tax cuts may
stimulate short-term economic growth, their sustainability depends on administrative
efficiency and overall economic conditions. Increased taxes can fund essential public services
and address income inequality, but striking a balance between revenue generation and
economic growth remains a challenge. As countries navigate these complexities, crafting
effective tax policies that align with economic priorities and social welfare objectives is
paramount for achieving sustainable and inclusive growth.
All in all, the debate surrounding tax cuts and tax increases presents valid arguments from
both sides. The decision on whether to implement tax cuts or tax increases depends on
various factors, including the economic context, the need for stimulus, funding critical
services, and addressing economic equality. While tax cuts can potentially stimulate
consumer spending and motivate economic growth, their impact may vary, and they may lead
to increased government borrowing. On the other hand, higher taxes can provide funding for
essential public services, promote equality, and discourage harmful practices. It is important
for policymakers to carefully assess the specific circumstances of each country and consider
the collective needs of society when making decisions on tax policies.