4 Reasons Why Governments Tax People

It is commonly believed that death and taxes are two things that you cannot avoid as long as you are alive

. Whether they are in the form of income tax or value added tax on your bottle of soda, taxes are a way of life in all places in the world. But what are the reasons for taxation?

Government Revenue

This is obviously the most common reason that we know for taxation. Governments all around the world need to run and they must get money from somewhere. Depending on the type of government, the proportion of taxation as a source of revenue will differ. For highly capitalistic societies where governments do not involve themselves in business, taxation forms a huge proportion of government revenue. On the other hand, countries where governments run businesses, especially those that deal with natural resources such as oil and minerals, revenue from taxation may not form a big proportion of the government revenue.

Discourage Consumption or Production of Certain Goods

Apart from being a source of revenue for the government, taxation is also used by administrations to discourage the consumption or production of certain goods and services. For example, the government might want to discourage the consumption of alcohol and cigarettes. Since it may be unwilling or unable to ban these goods, they may choose to impose additional taxes on the commodities so as to reduce the demand for that commodity. The same thing happens to services such as gambling.

Such types of taxes are referred to as excise taxes.

Redistribution of Income

No society in the world has all the people having the same financial ability. Even in the communist countries, some people were more equal than others. Because of these, governments all over the world try to redistribute income from the rich to the poor. This is usually done through progressive income taxes and taxation of luxury goods. The funds received from here are channeled back to the economy through subsidies and loans to the poor. The effectiveness of such schemes depends on a lot of factors including the level of transparency and accountability in government, the sustainability of the project and the existing political environment.

Monetary Policy

Taxation has always been linked to the fiscal policies of governments (policies that deal with government spending.) However, taxation can also be used in formulating the monetary policy of any economy. Taxation is also used as one of the tools to curtail spiraling inflation in the classic case of too much money chasing too few goods. The government may choose to increase income tax on high income earners so as to mop up excess demand which triggers inflation. It can also be used in increasing the prices of certain commodities so as to dampen demand. However, when using taxation to reduce inflation, it is always important to make sure that you do not end up worsening the already bad situation by increasing the prices of raw materials. This might cause the inflation to spiral out of control.

by: David de Souza

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