Purpose of Taxation

Introduction

The words tax and taxation are being used interchangeably and have been defined by different writers and authors using different perspective.

According to Wikipedia Dictionary “A tax is a compulsory contribution to the state revenue, levied by the government on workers income and business profits or add to the cost of some goods, services, and transactions.

Investor words equally defined tax as “Fee charged (levied) by a government on a product, income nor activity”.

On the other hand, taxation is defined by free dictionary as the act or practice of imposing taxes. Another definition is a means by which government finance their expenditure by imposing charges on citizens and business (Business Dictionary).

Purpose of Taxation

The purpose of taxation is to raise revenue to meet government expenditure and other as follows:

1. To reduce income inequalities – government uses progressive tax system to reduce inequalities in income by taxing the rich more than the poor.
2. To control inflation – Demand pull inflation can be controlled by increasing income and reducing aggregate demand. The rate can be lowered to reduce inflation too.
3. To discourage the consumption of specifics goods such as Cigarettes, alcohol etc are harmfull goods which government tries to reduce their consumption by increasing their taxes.
4. To protect infant industries: Government can levy high taxes (import duties) on rival goods imported to discourage their consumption and promote infant industries.
5. To correct balance of payment deficit: When importation is on the high side, government increase import duties to discourage it and promote local industries through tax reliefs on export products.