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
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.
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
- 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
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
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