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Local and federal governments require financial resources to run their operations and provide essential services to the public. One of the approaches that these administrations use to raise funds is taxation. Adam, Kammas, and Lapatinas (2015) define tax as a mandatory monetary charge or other forms of tariffs that a state imposes on its people or organizations. Individuals or institutions that default in tax remittance may be prosecuted. The majority of nations have tax systems that target both corporate and personal income. Some administrative units also impose gift tariffs, sales, estate, payroll, and property taxes. This paper will focus on the concept of tax, its purpose, and its impacts on society.
Concept of Tax
Taxation refers to a strategy that a government uses to collect money from its citizens and businesses to aid in the provision of vital services like security, health care, and education. Altshuler and Goodspeed (2015) identify two forms of taxes, which are indirect and direct. As per Bratten, Gleason, Larocque, and Mills (2017), direct taxation refers to a state where an individual (employee or business person) remits levies to the government without engaging a third party.
Examples of direct tax include real property, income, corporate, and personal asset levies. On the other hand, indirect taxation refers to a condition where taxpayers do not remit their levies to the government in person. Instead, an administration breaks down a tariff into multiple rates and shares them amid numerous units of society, including professionals, employers, manufacturers, and consumers (Altshuler & Goodspeed, 2015).
There are multiple taxation systems, among them income-based, progressive, consumption-oriented, proportional, and regressive. Income-based taxation refers to a circumstance where a government deducts levies from a person’s or business’ revenue. Consumption-based tariff is enforced depending on the cost of products and services. A progressive levy refers to a system where an entity’s or person’s tax rate swells according to the rise in total taxable revenue. Conversely, a regressive system is a scheme where poor people are overtaxed relative to the rich. It treats all taxpayers evenly regardless of their level of income. A proportional system assigns a constant tax rate to all people without considering their income brackets.
Purpose of Tax
The key goal of taxation is to raise the fund needed for social and economic development. It is imperative to acknowledge that most governments use tax as the main source of money for their various projects. Adam et al. (2015) argue that a country’s economic growth is pegged on capital formation. Consequently, local and federal administrations use taxation as an avenue for capital accumulation. They achieve this objective by increasing existing tax rates or introducing additional levies. Another purpose of taxation is to preserve price stability, albeit on a short-term basis. Hennighausen and Heinemann (2015) assert that a levy is an efficient approach to managing inflation. Governments regulate private spending by increasing the rate of direct taxes.
This move is useful in alleviating strain on commodity markets. Supporters of the chartalist theory of money creation argue, “Taxes are not needed for government revenue, as long as an administration in question is able to issue fiat currency” (Bratten et al., 2017, p. 12). They maintain that the primary reason for tax collection is to aid in support of specific industries and provision of essential services like social security. Imposing high tax rates on affluent individuals helps governments to bridge the gap between the rich and the poor.
Types of Taxes
The Organization for Economic Co-operation and Development (OECD) has established numerous categories of taxes, among them, income, property, wealth, and value-added. A majority of the administrations deduct levies from individuals’ and company’s revenues. Property tax is also known as millage tax and represents the tariffs imposed on assets that a person owns. Some countries order their people to disclose information regarding their assets and liabilities (balance sheet). The government uses this data to determine the amount of tax that an individual should pay. Generally, wealth tax is computed as a proportion of a person’s net worth.
Value Added Tax
Other terms that are used to refer to this form of duty are turnover tax, single business tax, and Goods and services tax. It is a type of levy that is imposed on manufactured products or services. Hennighausen and Heinemann (2015) maintain that the rate of value-added tax is determined incrementally. This means that it varies as the worth of a good or service grows in subsequent phases of manufacture or distribution.
Nevertheless, it is imperative to note that value-added tax is remitted at the final stage of the supply chain (Adam et al., 2015). In the case of merchandise, manufacturers do not pay this levy. Instead, it is deducted at the retail point, which marks the last phase of product distribution. The Money collected through this system is used in infrastructure development. It is necessary to mention that not all products are subjected to value-added tax. Some countries do not impose tariffs on goods and services that are meant for export.
Principles of a Sound Taxation System
Three essential principles of a sound taxation system are fiscal adequacy, theoretical justice, and administrative feasibility. The theory of fiscal adequacy argues that an administration should make sure that the amount of money collected from the public and business entities is sufficient to meet all its expenses. Governments have a duty to provide fundamental services to the public, hence the need to guarantee that it does not run out of finances.
The principle of theoretical justice maintains that a taxation system should not be oppressive to a certain group of people. Instead, countries ought to have different modes of levy collection that are conscious of the economic status of their citizens. In the United States, people remit duties based on their abilities. The American government has set various income brackets which it uses for taxation purposes. Individuals who earn over $500,000 pay 37% of their earnings as levies (Adam et al., 2015).
The theory of administrative feasibility states that a taxation system should be easy to implement. The laws that govern tax reduction should not be oppressive to taxpayers. Additionally, there should be various modes of payment to eliminate potential inconveniences.
Impacts of Taxation on Society
Governments use tax money to fund projects that are meant to benefit citizens. One of the impacts of the tax on society is that it assists in the provision of critical services like health care. A study of the Nordic countries (with high taxation) reveals that they enjoy quality medical services, which has contributed to low mortality rates (Altshuler & Goodspeed, 2015). Altshuler and Goodspeed (2015) argue that tax is paramount to improving the level of literacy in a country.
Governments use tariff money to build schools and subsidize the cost of education. This initiative ensures that children from poor backgrounds have access to quality learning. Although levy helps to strike a balance in wealth distribution, it may discourage some people from securing jobs. For instance, progressive tax may result in individuals turning down promotions due to fear of being heavily taxed.
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Tax refers to statutory deductions that employees, employers, and companies make to the government to facilitate the delivery of essential services and infrastructure development. State and federal administrations use levies to accumulate capital and regulate commodity markets. An effective taxation system should not be a burden to the public and must be sustainable. Proponents of tax payment argue that this fund has many benefits to society, among them the improvement of health care and literacy levels. Nonetheless, some forms of duties, such as progressive levies, may prevent people from accepting job promotions.
Adam, A., Kammas, P., & Lapatinas, A. (2015). Income inequality and the tax structure: Evidence from developed and developing countries. Journal of Comparative Economics, 43(1), 138-154.
Altshuler, R., & Goodspeed, T. J. (2015). Follow the leader? Evidence on European and US tax competition. Public Finance Review, 43(4), 485-504.
Bratten, B., Gleason, C. A., Larocque, S. A., & Mills, L. F. (2017). Forecasting taxes: New evidence from analysts. The Accounting Review, 92(3), 1-29.
Hennighausen, T., & Heinemann, F. (2015). Don’t tax me? Determinants of individual’s attitude towards progressive taxation. German Economic Review, 16(3), 255-289.