Taxation | Characteristics & Objectives

Tax is a compulsory levy imposed on an economic unit (individuals, groups, firms, institutions etc.) by a public authority (the government), without any corresponding entitlement to receive definite and direct quid pro quo (equivalence) from the government.

Characteristics of a Tax

  • A tax is a payment made by taxpayers, which are used by the government for the benefit of all citizens.
  • A tax is not levied in return for any services rendered by the government to the taxpayers. In other word, the essence of tax is the absence of a quid pro quo.
  • It is compulsory contribution imposed by the government on the people residing in the country. Since it is a compulsory payment, a person who refuses to pay a tax is liable to punishment.
  • But a tax is to be paid only by those who come under its jurisdiction.
  • Similarly, persons who buy a commodity which carries a tax on it, pay the tax while others do not pay.

OBJECTIVES OF TAXATION

To raise revenue: The principal objective of taxation is to raise revenue for the government, which is needed for the provision of essential services and execution of other activities of the government.

To regulate the production of certain commodities: In order to regulate the production of some certain harmful product, government imposes heavy tax on the production of such commodity.

To control the consumption of certain commodities: Government imposes tax on some commodities which are considered to be harmful or too luxurious, such tax is meant to increase the price of the commodities, hence a reduction in the demand and subsequent consumption.

To control monopoly powers: Certain taxes are levied in order to curb monopoly powers. Such taxes include excess profit tax.

To redistribute income: Taxation can be applied as a means of redistributing income. A progressive tax system takes away more money from the rich and the proceeds are used in providing goods and services whose marginal utilities are higher for the poor than the rich.

To protect infant and domestic industries: High import duties can be used to discourage the importation and consumption of foreign goods which usually out-compete the locally produced ones.

To prevent dumping: High import duties can be used to prevent dumping of relatively cheap products in the developing economies by the more technologically advanced countries.

To maintain balance of payment: Balance of payment deficit can be corrected by imposing taxes which discourages imports while taxes/tariffs that encourage exports are at the same time introduced.

To curb inflation: Certain forms of tax can be used to reduce the level of inflation. A high rate of taxation without corresponding increase in government expenditure will reduce disposable income of consumer. This will help to reduce prices.

To regulate business activities: The form and direction on business activities can be regulated through taxation. A tax may discourage or encourage a given line of business. A high rate of taxation will discourage a business activity while subsidy (negative tax) encourages same.

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