Tax rate affect on changes relative prices of products. Therefore, most economists, chiefly neoclassical economists, argue that taxation creates market distortion and effect in economic inefficiency unless there are (positive or negative) externalities associated with the activities that are taxed that need to be internalized to reach an efficient market output. They have therefore search to recognize the kind of tax system that would minimize this distortion. Recent scholarship recommends that in the USA, the federal government effectively taxes investments in higher education more heavily than it subsidizes higher education, thereby supporting to a shortage of capabled labours also unusually high differences in pre-tax revenues between highly educated also less-educated workers.
Taxes can even have effects on labor supply: we could take into consideration a model in which the consumer picks the number of hours spent working or the amount spent on consumption. Let us assume that only one good exists also no income is saved.