A tax is a financial charge or other levy imposed on an individual or a legal entity by a state.
Taxes are mainly of two types; direct or indirect taxes. These can be defined as a financial burden on individuals or property for supporting functioning of the government.
Taxes cannot be considered as voluntary payments or donations but rather are enforced contributions which are extracted as per legislative authority government has. Government imposes this type of enforced contribution under different names such as toll, duty, custom, aid, excise, subsidy, or other similar names.
Utilization of tax funds :
The funds available through taxation are used by states & their functional equivalents to carry out many functions. These functions include expenditures on law & public order enforcement, development of economic infrastructure, social engineering, public works, and operations of government itself. Nowadays most governments use taxes for funding public & welfare services such as pension for the elderly, public transportation, education & health care system, and unemployment benefits. Some other common public utilities which are funded are like water, waste & energy management systems.
In addition, taxes are applied to influence macroeconomic performance of the economy, fund military & foreign aids, or to modify patterns of employment or consumption within the economy. Patterns are modified by making some classes of transaction more or less attractive in the economy.
Purpose of taxation :
Let us now look at the four main purposes of taxation which are:
Revenue: Taxation is used to raise money to spend on hospitals & schools, roads and on other indirect government functions like justice system or good regulation.
Redistribution: Normally it means transfer of wealth from richer sections of society to poorer sections. This function is uniformly accepted across most democracies but the extent to which transfer of wealth should take place has remained a
Repricing: Taxes are imposed frequently to address externalities; taxation is applied on tobacco to discourage smoking. Many people advocate such policies as preventive measures. Another example could be implementation of carbon tax for tackling global warming.
Representation: The American revolutionary slogan “no taxation without representation” meant rulers tax citizens & accountability is demanded from rulers as other part of the bargain. Many studies have shown that direct taxation results in higher degree of accountability & better governance while indirect taxation tends to have lesser effects.
Economics of taxation :
In economic terms, wealth transfer from businesses or households to the government occurs by use of taxation. Economic theories of taxation look at the question of minimizing loss of economic welfare through taxation. These theories also discuss how redistribution of wealth can be performed in most efficient manner.
While arguments exist regarding taxation but these are more about the degree of taxation rather than being about taxation itself. And most political views support the view that taxes are beneficial for society and can be used for the benefit of majority of population.
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