Reasons and Principles of Taxation


A tax is a compulsory payment to the state which is levied on income, wealth, goods and services. The taxes levied by local authorities are referred to as rates. There are no direct benefits of a tax to the individual tax payers by societies as a whole. Taxes can be either direct or in direct.


Reasons for taxes

1. Revenue purpose
The government impose direct taxes and indirect taxes to raise revenue. Taxes form the main source of government revenue.

2. Redistribution of income
Taxes are used to redistribute income. The government may impose high taxes on the rich in the society and then use some of the income from taxes to assist the poor in the form of subsidies. By so doing, the government reduces the gap between the poor and the rich.

3. Control of certain types of consumption
The government imposes taxes on certain types of goods in order to reduce the consumption of such goods. Goods like alcoholic drinks and cigarettes have taxes imposed on them to discourage their consumption.

4. Protection of infant and home industries
Taxes levied on imports have the effect of raising the prices of these imports thereby making them less competitive . infant and home industries will therefore be able to compete with those foreign goods.

5. Correction of balance of payment deficit.
When taxes are imposed on import the demand for them falls. Demand for home made goods increase. This helps to correct the deficit in the balance of payments by reducing the out flow of foreign exchange.

6. Preventing dumping
Dumping is the practice by firms by selling their products cheaper abroad than at home. To prevent dumping, heavy taxes are imposed on imported goods.

7. Control of inflation
The government can control inflation by increasing taxes on disposable income and hence reduce consumption and the rate of inflation .

8. Direct, the pattern of investment
The government may use taxes to discourage location in particular areas. Taxes could also be levied on certain inputs to discourage the production of certain goods.


Principles of Taxation

A good tax system should posses the following qualities
1- Equity
This principle states that taxes should one levied according to the ability of the tax payer to pay. This implies that the rich should pay more than the poor.

2- Certainty
The tax payer should know clearly the amount of money he has to pay as tax. He should know when and how he has to pay.

3- Convenience
Taxes levied should be in such a way that the time and manner should be convenient to the tax payer for example the pay as you earn system where taxes are collected at source is very convenient to the tax payer.

4- Economy
The cost collecting, the taxes and administering the taxes should be small in relation to the yield (ie the total amount collected . a good tax system must have a high net yield.

5- Flexibility
a good tax system should be flexible i.e it should be capable of being changed easily whenever the need arises.

6- Efficiency
A good tax system should be able to achieve the aim for which it is imposed. If its aim is to yield revenue or stop the consumption of certain products. Ti should achieve it with no side effects.

The incidence and impact of a tax.
The impact of a tax is the effects of a tax on the person who finally pays the tax.
The incidence of a direct taxis on the initial tax payer. The incidence of an indirect tax may be borne by the producer of shifted completely or partially to the consumer depending on the elasticity of demand and supply of the commodity.



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