Economics explained
Category:
microeconomic policies
Taxes
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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.