Group 1

What is Taxation?

Taxation is the method by which governments finance their spending by levying charges on their
citizens and business entities in order to generate revenue. In economics, taxes are divided between
buyers and sellers and the tax burden falls on the group that has to pay for the tax. In modern countries,
taxation is involuntary and failure to pay different taxes can result in imprisonment. Government often
use taxation to encourage or discourage certain economic decisions.

Tax burden is related to price elasticity of supply and demand, and elasticity refers to how demand
and supply of products responds to price or income changes. If supply is more elastic than demand then
the tax burden falls on the buyers, and if demand is more elastic than supply then producers bear the
cost. In the United States, the Internal Revenue Service is in charge of ensuring that citizens and
corporations pay their taxes.

A tax is a compulsory, unrequited payment to general government.

Types of Taxes

Income tax- are taxes on a percentage of a person or corporation's earnings.

Sales tax- is a tax that the government imposes on certain good and services.
Property tax- is a tax levied on land and property assets.
Tariffs- are taxes on imported goods and high tariffs often signify a country's aim to
strengthen domestic businesses.

Purpose of Taxation

The primary purpose of taxation is to allow a government to allocate resources as necessary.

Typically, governments use tax money to support expenses related to building and technology
infrastructure, military programs, public safety, environmental protection and education.

The most basic function of taxation is to fund government expenditures. Varying justifications and
explanations for taxes have been offered throughout history. Early taxes were used to support ruling
classes, raise armies and build defenses. Often, the authority to tax stemmed from divine or supranational
right.

Other Purpose of Taxation

Taxes are mainly used to finance the expenses incurred by government to manage an economy.
These expenses include: health care, education, garbage collection and operating government business
entities. Taxation is also used by government for several other purposes.

a. To reduce pollution by taxing offending firms

b. To discourage unhealthy lifestyle e.g. a tax on cigarettes

c. To protect local and infant industries by taxing imports

d. To achieve greater equality of wealth and income. Revenue from taxation is used to help the very poor
e.g. providing food stamps.

e. To improve the balance of payments (BOP) by increasing the duties charged on imported goods.

f. To control spending in an economy thus reduce inflation