effects of taxes

Topics: Tax, Income tax, Taxation Pages: 2 (705 words) Published: February 16, 2014
Taxation is a system of compulsory contributions levied by government on persons, corporations, and properties, primarily as a source of revenue for government’s expenses and other public purposes. It is for this reason, in order for the government to provide the public with the necessary goods and services, revenue must be raised through taxation. This revenue is generated through direct and indirect forms of taxation. Direct taxes are paid on income. This effectively means that the more income you earn the greater your contribution is expected to be to the state. Indirect taxes are levied on expenditure. This tax is imposed on the basis of the individual consumption – the individual pays only on what he consumes. However, it must be noted that taxation is used not only to raise revenue but also to regulate consumption and may even be used to curtail various forms of business activities. For instance, alcoholic beverages and tobacco may be taxed heavily on the grounds that their use is hazardous to the health of individuals. Such revenue, often called a “sin tax”, is infact a penalty paid by the users of the substance. The regulatory aspects of taxation are more apparent in indirect taxes, such as customs duties and taxes, than in direct taxes such as income tax. For instance, government can control private consumption, especially of imported goods, by increasing customs tariffs. An increase in taxation on personal income on the other hand, may result in a decrease in private savings without affecting the level of consumption. The effectiveness of any government, depends on the willingness of the people governed to surrender or exchange a measure of control over their persons and property, in return for protection and other services. Taxation is one form of this exchange. In designing tax systems, governments customarily consider three basic indicators of taxpayer wealth or ability to pay: what people own, what they spend, and what they earn. The kinds of...
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