An introduction to taxation

Governments placing imposed levies on individuals or organisations is known as taxation. Almost every country in the world levies taxes, which are primarily intended to finance government expenditures but may also be used for other purposes.

In contemporary economies, taxes are the main source of revenue for the government. Taxes are unrequited forced levies, which means that they are frequently not paid in exchange for a particular item or service, the sale of government property, or the issuance of public debt. Taxes are distinguished from other sources of revenue by this.

Although taxes are theoretically collected for the benefit of all taxpayers, the duty of each individual taxpayer is unconnected to any specific advantages acquired. There are, however, significant exceptions. Payroll taxes, for instance, are frequently charged on labour income to support social security programmes such as retirement benefits, medical coverage, and others, all of which are likely to be advantageous to the taxpayer. 

Due to the possibility that there is a relationship between taxes paid and benefits received, payroll taxes are usually referred to as "contributions" (as in the United States). Even Nevertheless, the payments are usually necessary and the link to benefits is occasionally only loose. Another example of a tax that is, at least loosely, linked to benefits received is the usage of vehicle fuel taxes to pay for the construction and maintenance of roads and highways, whose services can only be acquired by using charged motor fuels.

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Objectives of Taxation

In the 19th century, it was widely believed that taxes should be used largely to finance the federal government. In the past and in the present, governments have utilised taxes for purposes other than merely generating income. An effective way to examine the purpose of taxes, according to American economist Richard A. Musgrave, is to separate the objectives of resource allocation, redistribution of income, and economic stability. (International competitiveness and economic growth or development is occasionally specified as separate objectives, but they may often be included under the other three.)

If tax policy does not assist with market-determined allocations, the first aim, resource allocation, is advanced in the absence of a compelling justification for intervention, such as the need to prevent pollution. The second goal, income redistribution, is to reduce income and wealth distribution disparities. Maintaining high employment and price stability is the goal of stabilisation, which is accomplished through tax policy, government spending policy, monetary policy, and debt management.

These three goals are likely to clash with one another. For instance, changing the level or composition (or both) of taxes may be necessary to allocate resources, but doing so may have a negative impact on low-income households and undermine redistributive objectives. Another illustration would be excessively redistributive taxes that would not allow for the effective resource allocation necessary to attain economic neutrality.

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