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Objectives And Principles Of Taxation

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  • Last Updated : 23 May, 2022

There are many sources of revenue for the government but taxation is the most significant source. A tax is a mandatory payment made to the government by individuals and businesses based on certain well-established rules or criteria. These criteria, such as income earned, property owned, capital gains realized, or expenditure incurred (money spent) on domestic and imported goods. Taxation is utilized as an economic policy tool in the modern world. It has an impact on overall output, consumption, investment, industrial location and techniques, the balance of payments, income distribution, and so on. 

Type of Taxes:

The types of taxes are proportional, progressive, and regressive. As its name suggests the proportionate tax is one that places the same relative burden on all taxpayers. It is one in which tax liability and income develop in lockstep. In the proportional tax system, regardless of income, everyone pays the same percentage tax. A progressive tax increases tax liability in a way that is not proportionate to income growth. A regressive tax increases the relative burden less than proportionally. As a result, progressive taxes are seen to reduce income distribution inequities, but regressive taxes might actually increase them.

Objectives of Taxation:

1. Economic Development: Economic development is one of the most essential goals of taxes. The expansion of capital formation is a major determinant of any country’s economic progress. Capital formation is regarded to be the linchpin of economic progress. However, capital shortages are common in less developed countries. To address capital scarcity, governments in these nations deploy resources in order to accelerate capital formation. The government uses tax income to increase both public and private investment through various expenditures. With proper tax planning, the savings-to-national-income ratio may be raised with further helps the economy in development. Some economists advocate for tax reforms that will encourage economic growth. This strategy might require a qualitative reorganization of the tax system. However, tax incentives have a limit, especially when it comes to stimulating the economic development of specific businesses or areas. 

2. Non-Revenue Goal: Non-Tax Revenue is the government’s recurring revenue from sources other than taxes. They are extremely significant since they assist the government and enhance public finance. The decrease in income and wealth inequality is another non-revenue goal of taxes. This can be accomplished by taxing the wealthy at a greater rate than the poor, or by implementing a progressive taxation system.

3. Price Stability: Taxes may be used to maintain price stability, which is a short-term goal of taxation. Taxes are seen to be a good way to keep inflation under control. Increased direct tax rates can be used to limit private spending which further reduces excessive demand. Naturally, with this, the commodities market is under less stress. When it comes to indirect taxes on products, they worsen inflationary trends. On the one hand, high commodity prices discourage consumption while also encouraging saving. When taxes are reduced during deflation, the opposite impact occurs.

4. Balance of Payment (BOP) Difficulties are Reduced: Growing current account deficits are sometimes a sign of impending balance of payments problems. Capital inflows, other net currency inflows, or a decrease in foreign currency reserves are all required to fund current account deficits. Customs tariffs and other taxes are also used to regulate imports of particular commodities in order to reduce the severity of balance of payments problems and encourage domestic manufacture of import alternatives.

5. Full Employment: Since the level of employment is determined by effective demand. A government seeking to achieve full employment must lower its tax rate. As a result, disposable income will increase and in return demand for products and services will also increase. Increased demand will drive investment, resulting in a rise in income and employment through the multiplier effect. The bigger the disincentives to labor, the higher the tax wedge. Reduced marginal tax rates on earnings and wages, for example, people may be more motivated to work harder if they pay less tax on their profits.

Principles of Taxation:

1. Horizontal Equity: The horizontal equity concept is important in taxation and it suggests that people in similar or identical positions will have the same tax burden. It is an economic theory that maintains that people with identical incomes and assets should pay the same tax rate. Horizontal equity should apply to people who are regarded as equal.

2. The Ability-to-Pay Principle: According to the ability-to-pay concept, individuals with a better ability to pay taxes (as measured by income and wealth) should pay more. This concept suggests that individuals who have achieved success should be ready to give back a bit more to the society that helped them achieve it. According to this, the overall tax burden should be allocated among individuals based on their ability to bear it, taking into consideration all relevant personal characteristics. In this instance, personal levies are the most suitable taxes.

3. The Principle of Benefit: Taxes, according to the benefit principle, serve a similar purpose to prices in private transactions. Namely, they aid in determining what activities the government will undertake and who will pay for them. In fact, most public services are difficult to apply the benefit principle because individuals are often unwilling to pay for a publicly supplied service, such as a police department unless they can be excluded from the service’s advantages. The benefit concept is most successfully applied in the funding of roads and highways through vehicle fuel taxes and user fees (tolls), those who use have to pay for that.

4. Stability: Tax rules should be modified infrequently. When the tax rules are modified, they should be part of comprehensive and systematic tax reform. The reform includes enough provisions for a fair and orderly transition. Frequent changes in tax legislation can lead to lower compliance or behavior that tries to adjust for possible future changes in the tax system. 

5. Clarity: Tax rules and regulations must be understandable to the average taxpayer. They must be as straightforward as feasible. Tax rules should be plain and definite. This not only leads to a significant amount of inaccuracy but also undermines honesty and respect for the law. Unclear tax will discriminate against the poor and the uninformed, who are unable to take advantage of the myriad legal tax-saving alternatives accessible to the educated and wealthy. Attempts to establish fairness have occasionally generated complications, contradicting reform goals.

Conclusion:

As aforementioned, the primary goal of a national tax system is to produce revenue to pay all levels of government spending. A tax system should have some desirable properties, such as simplicity, ease, and productivity. If the government is to attain equality the tax system should be clear. The majority of tax systems are founded on a reasonable compromise between several concepts and canons. The Indian tax system is not equitable. It leads to inequity. Because the poor pay the majority of indirect taxes, the income distribution is becoming increasingly unequal. The Indian tax system is very inefficient. Although India’s income tax rate is relatively high, the amount collected from it is very low. Indirect taxes induce inflation by introducing cost-push pressures on the supply side.

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