TAXATION:

DEFINITION: A means by which governments finance their expenditure by imposing charges on citizens and corporate entities is called taxation Governments use taxation to encourage or discourage certain economic decisions. For example, reduction in taxable personal (or household) income by the amount paid as interest on home mortgage loans results in greater construction activity, and generates more jobs. (taxation, 2013)

Taxation refers to the act of a taxing authority actually levying tax. Taxation as a term applies to all types of taxes, from income to gift to estate taxes. It is usually referred to as an act; any revenue collected is usually called "taxes." (taxation, 2013)

TYPES OF TAXATION:
Tax is collected in terms of money or cash. In various countries, the rules and regulations regarding taxation are different and sometimes the nomenclature of the type of tax is different. The different types of tax can be enumerated as below INCOME TAX: The income tax is normally levied on the earnings of business entities as well as individuals. Corporations are also liable to pay income tax. Normally authorities levy tax on net gains, net profits and other forms of income. The state and local income tax are imposed primarily in the US and operate along with the federal income tax. These taxes are used as reductions for calculating the Federal income tax. PAYROLL TAX: Payroll taxes are the state and federal taxes that you, as an employer, are required to withhold and/or to pay on behalf of your employees. You are required to withhold state and federal income taxes as well as social security and Medicare taxes from your employees' wages. You are also required to pay a matching amount of social security and Medicare taxes for your employees and to pay State and Federal unemployment tax.

PRINCIPLES OF TAXATION:
HORIZONTAL EQUALITY: The principle of horizontal equity assumes that persons in the same or similar positions (so far as tax purposes are concerned) will be subject to the same tax liability. In practice this equality principle is often disregarded, both intentionally and unintentionally. Intentional violations are usually motivated more by politics than by sound economic policy (e.g., the tax advantages granted to farmers, home owners, or members of the middle class in general; the exclusion of interest on government securities).

THE ABILITY-TO-PAY PRINCIPLE: The ability-to-pay principle requires that the total tax burden will be distributed among individuals according to their capacity to bear it, taking into account all of the relevant personal characteristics. The most suitable taxes from this standpoint are personal levies (income, net worth, consumption, and inheritance taxes). Historically there was common agreement that income is the best indicator of ability to pay. BROAD BASING: Taxes should be spread over as wide as possible section of the population, or sectors of economy, to minimize the individual tax burden. In general, tax base-broadening reforms are identified to economic decisions on work, saving, investment and consumption, they should increase output and improve social welfare. EFFICIENCY: Tax collection efforts should not cost an inordinately high percentage of tax revenues. The efficiency principle lays the theoretical groundwork for cost-benefit analysis, which is how most critical business decisions regarding the allocation of resources are made. On its own, however, there are simply too many assumptions that must be made to determine "marginal social costs", which makes the usefulness of the efficiency principle questionable in practical terms. CLARITY: Tax laws and regulations must be comprehensible to the taxpayer; they must be as simple as possible (given other goals of tax policy) as well as unambiguous and certainboth to the taxpayer and to the tax administrator. STABILITY: Tax laws should be changed seldom, and, when changes are made, they should be carried out in the context of a general and systematic tax reform, with adequate provisions for fair and orderly transition. Frequent changes to tax laws can result in reduced compliance or in behavior that attempts to compensate for probable future changes in the tax code. BENEFIT PRINCIPLE: Under the benefit principle, taxes are seen as serving a function similar to that of prices in private transactions; that is, they help determine what activities the government will undertake and who will pay for them. If this principle could be implemented, the allocation of resources through the public sector would respond directly to consumer wishes.

IMPORTANCE OF TAXATION:
1. OPTIMUM ALLOCATION OF AVAILABLE RESOURCES: Tax is the most important source of public revenue. The imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. The revenue is allocated on various productive sectors in the country with a view to increasing the overall growth of the country. Tax revenues may be used to encourage development activities in the less developments areas of the country where normal investors are not willing to invest.

2. RAISING GOVERNMENT REVENUE: In modern times, the aim of public finance is not merely to raise sufficient financial resources for meeting administrative expense, for maintenance of low and order and to protect the country from foreign aggression. Now the main object is to ensure the social welfare. The increase in the collection of tax increases the government revenue. It is safer for the government to avoid borrowings by increasing tax revenue. 3. ENCOURAGING SAVINGS AND INVESTMENT: Since developing countries has mixed economy, care has also to be taken to promote capital formation and investment both in the private and public sectors. Taxation policy is to be directed to raising the ratio of savings to national income. 4. REDUCTION OF INEQUALITIES IN INCOME AND WEALTH: Through reducing inequalities in income and wealth by using a efficient tax system, government can encourage people to save and invest in productive sectors. 5. ACCELERATION OF ECONOMIC GROWTH: Tax policy may be used to handle critical economic situation like depression and inflation. In depression, tax is set to increase the consumption and reduce the savings to increase the aggregate demand and vice verse. Thus the tax policy may be used to strengthen incentives to savings and investment. 6. PRICE STABILITY: In under developed countries, there is another role to maintain price stability to ensure growth with stability. 7. CONTROL MECHANISM: Tax policy is also used as a control mechanism to check inflation, consumption of liquor and luxury goods and to protect the local poor industries from the uneven competition. Taxation is the only effective weapon by which private consumption can be curbed and thus resources transferred to the state. Thus the economy can ensure sustainable development.

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