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Taxation

According to Oxford dictionary taxation is defined as:
"a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services , and transactions"

The reasons for taxation can be for a number of reasons, however it usually is due to these four reason:

- To pay for government expenditure.
Governments need money to cover their expenditure programs. They can borrow money but usually it comes from taxation as this is more effective, doesn't result in the country being in debt and it can decrease the inflation rate.
- To correct market failure such as externalities.

To correct market failure governments can intervene by changing the tax of products and thus changing demand. They could do this for many different products. One example is pollution. To balance the externalities of market failure government can set a ta which would result in either A. The pollution to be decreased or B. the company paying taxes which then can be used to get rid of the pollution.

-To manage the economy as a whole

Taxation can also be used to influence the economy on a macro-economic level. Government can use taxation to regulate and influence the rate of inflation, unemployment and even balance of payments.

-To redistribute income

Although it is not a popular method it is used. This is done by specifically targeting a group of society to increase their tax. This is usually done by either indirect tax such as taxation of luxury goods or by direct tax by implementing to increasing a progressive tax system.


There are two different types of taxations; Direct Taxation and Indirect Taxation:

Direct Taxation: this is done by taxing and individual or organization directly by taxing their Income or Revenue. This is called a direct tax because it is directly related to your income.
Indirect Taxation: this is done by taxing a product or service. This is called an indirect tax because not everyone is affected by it. i.e. if wood is taxed than only people who buy wood or companies that use wood would have to pay for the tax. People who won't use wood will not be affected by the tax.


Apart from different taxation types such as Direct or Indirect Taxation there are also different Methods of Taxation.

- VAT (Value added tax): The VAT is a product tax. It is usually placed on a product. The products price then increased by the VAT – the tax already payed by the company in the production of the product. For example if an there is a VAT on ipods of 50% and the ipod costs 40$ than with the VAT the ipod costs 60$. however since apple, the maker of ipods has already payed 25% tax on the headphones jacks the percentage payed will be taken away from the VAT which is result in an only 25% increase of the original 50% increase resulting the the ipod to be sold at 50$. The VAT is usually pushed to the consumer rather than the company paying for it.

- Income Tax: There are three different ways of taxing income; Regressive system, Proportional system and Progressive system.

The Regressive system is constructed in a way that the higher your income the less % the individual or company has to pay. This is done so that everyone has to pay around the same amount as everyone else.
The Proportional system is constructed in a way that everyone has to pay the same %, this is done so that everyone pays the same amount proportionately to their income.

The Progressive system is constructed in a way that the higher your income the greater the individual or company has to pay. This is done is a way, basic on the theory that the richer the more money they can afford to give away.


Each tax has a result to it, here are some of the major ones:

- VAT and excise duties: This would often result in a supply curve to shift to the left which in turn would lead to a fall in the quantity demanded.
- Income Tax: This usually results in a fall of supply in the labour of a market.

- Corporation Tax: A corporation tax is likely to result in a fall of supply of entrepreneurs in a market.


Overall taxation can be used for many different reasons. Mainly it is to gain money or regulate a market. It is usually not a very popular way as governments that impose taxes usually will not stay in office for a very long time. Taxation is also a fiscal manor to regulate inflation as this would decrease that consumption capacity of an economy resulting in a decrease of the inflation rate.

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