Taxes

A tax is a levy or charge imposed by a government to raise costs of production and to reduce consumption of certain goods or services.

Purpose

Taxation has several functions.

To raise revenues for the Government as well as for local authorities

To cause certain products to be priced to take into account their social costs. Taxes raise the costs of production and therefore can limit the output of certain demerit products, such as alcohol and tobacco.

To redistribute income and wealth in the economy.

To protect industries from foreign competition. Tariffs imposed on foreign goods and services help to protect domestic firms from overseas rivals.

Tax burden

The tax burden is the amount of tax that households and firms have to pay.


Canons of taxation

A ‘good’ tax is one that is:

equitable – those who can afford to should pay more

economic – the revenue should be greater than the costs of collection

transparent – taxpayers should know exactly what they are paying

convenient – it should be easy to pay.