Definition of taxation an principle functions of taxation

Taxation is the process of imposing compulsory contribution on the private sector to meet the expenses which are incurred for a common good, that is, transfer payment process from the private sector (including the public) to the government with a view to financing public expenditure (such as provision of public and merit goods).

The functions of taxation can be discussed from the activities of the government and what it is meant to achieve. These are:

Raise revenue
The revenue is required to pay for the goods and services which the government provides. These goods are of two types – public and merit goods. Public goods, such as defence and police are consumed collectively and no one can be prevented from enjoying them if he wishes to do so. These goods have to
be provided governments. Merit goods such as education and medical care, could be and often are provided privately but not necessarily in the amounts considered socially desirable and hence governments may subsidize the production of certain goods. This may be done for a variety of reasons but mainly because the market may not reflect the real costs and benefits of the production of a good.
Thus public transport may be subsidized because the market does not take account of all the costs and benefits of the public transport system.

Economic stability
These are imposed to maintain economic stability in the country. During inflation, the government imposes more taxes in order to discourage the unnecessary expenditure of the individuals. During deflation, taxes are reduced in order to enable the individuals to spend more money. In this way the increase or decrease in taxes helps to check the big fluctuations in the prices and maintain economic stability.

Fair redistribution of income
A major function of taxation is to bring about some redistribution of income. First, tax revenue provides the lower income groups with benefits in cash and king. Second, the higher income groups, through a system of progressive taxation, pay a higher proportion of their income in tax than do the less well –off
members of society.

Pay interest on National debt
Taxes are also levied the government to pay interest on national debt.

Optimum allocation of resources
Taxes are also imposed to allocate resources of the country for optimum use of these resources. The amounts collected the Government from taxes are spent on more productive projects. It means the resources are allocated to achieve the maximum possible output in the given circumstances.

f) Protection policy
Taxes are also imposed to give protection to those commodities which are produced in the country. The government thus imposes heavy taxes, the individuals are induced to buy local products.

g) Social welfare
The government imposes taxes on the production of those commodities which are harmful to human health e.g. excise duty on wines, cigarettes etc.
NB: When taxes are imposed certain conditions must be fulfilled. These conditions are known as Principles
or canons of taxation. According to Adam Smith who first studied the principles of taxation these are
equity, certainty, economy, and convenience.



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