what is the purpose of taxation essay

The Importance of Taxation and Tax Administration (2024)

June 4, 2024

Let’s be honest: no one likes paying taxes. Oftentimes people complain about paying too much of it or about other people that aren’t paying enough. But taxation is a topic that should not be avoided. It is important for many different reasons as it touches the lives of each and every one of us. In fact, how we tax, who we tax, and why we tax determines the kind of society we become.

The purpose and impact of taxation can be divided into four categories:

Generating Resources

Equity and growth, social contract.

The most important purpose of taxation is to raise resources for governments to deliver essential public services. Taxes pay for many of the things that are fundamental to functioning societies around the world, such as health care, schools, and social services. Studies have shown that the bare minimum tax revenue for countries is at least 15 percent of gross domestic product in order to be able to provide basic services to their citizens. [1]

But it is important to look at both sides of the equation – not only taxes collected, but also how the money is spent to improve citizens’ lives and well-being. Many scholars suggest that there is a strong correlation between taxation and happiness. Year after year, countries that rank in the top ten of happiest countries around the world, are those with the highest tax rates. [2] The positive link between tax and happiness is fully mediated by citizens’ satisfaction with public services. In short: because of higher taxes paid by citizens, the government can provide a better life for its citizens with social benefits, healthcare, education, employment, and better infrastructure among others – resulting in happier citizens.

Next to being a source of revenue, taxation has the potential to be a powerful tool for stimulating development in a country. Corbacho et al. make a case for the reform of fiscal and tax systems to progressive systems that help promote economic growth, mobility, and social equality. “Taxation is more than revenue. It is a tool for development.” [3] All governments need revenue, but the challenge lies in carefully choosing not only the level of tax rates but also the tax base. Participants of the global conference of the Platform for Collaboration on Tax (PCT) voiced the concern that the trend toward lower taxation of capital (to encourage growth) is making it harder to counter the growing inequality of income and wealth. [4] These growing income and wealth gaps can undermine social cohesion and ultimately undermine economic growth as well. It should be a priority to ensure an appropriate distribution of the tax burden among taxpayers with a system that helps to preserve the income of poorer households.

In addition, it is important that governments design a tax compliance system that does not discourage taxpayers from participating. Tax rates that are too high can hold back the development of the private sector and the formalization of businesses. Lower tax rates are particularly important to smaller-sized businesses. Even though businesses of this size do not add significantly to government tax revenue, they have a vital contribution to economic growth and employment.

Historically, taxes have been used in many countries to encourage healthy behaviors and deter less healthy ones. Examples are tobacco taxation to lower tobacco consumption and green taxes to help the environment. In doing so, taxation can have a powerful impact on the outcome of human development. Another example is the potential impact taxation has on the development of gender equality, a subject that is receiving increased attention in the policy debate on public finance and the responsibility of the government towards its citizens. [5] It has been proven that taxes influence people’s behavior and choices, with implications for health outcomes, gender equity, and the environment. The choices a government makes will make or break a society.

Lastly, effective tax administration can change the relationship between citizens and the government. Taxation not only pays for public goods and services; it is a major ingredient in the social contract between citizens and government. “How taxes are raised and spent can determine a government’s very legitimacy”. [6] When citizens see the tax system as being fair and find value in the public services they receive, they are more likely to comply with tax laws. Trust in government is essential to create tax morale: the extent to which people accept a moral obligation to pay taxes as their contribution to society. It is therefore important for governments to continue to build public trust by improving the design and the administration of their tax systems.

That’s Why Tax Matters

Hopefully, the four impacts of taxation described in this blog help to soften the blow the next time you pay your taxes. We all have to pay our fair share, allowing the government to generate enough resources to fund the priorities of society. In turn, the government’s duty is to improve the lives and well-being of its citizens. This involves strengthening tax administration so that all citizens and businesses meet their tax obligations. And, establishing tax systems that are better structured and more effective in creating sustainable improvement for society as a whole.

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[1] Tax Capacity and Growth: Is there a Tipping Point?

[2] world happiness report 2020, [3] more than revenue: taxation as a development tool (executive summary), [4] pct – taxation and the sustainable development goals conference report, [5] gender & taxation – why care about taxation and gender equality, [6] paying taxes. why do tax rates and tax administration matter, sign up for updates.

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Explaining The Primary Purpose Of Taxation (Economics Essay)

Most people understand the basic reasons for taxation, such as to contribute to the well-being of the country as a whole. However, taxation is not that simple. The primary purpose of taxation is to contribute to the well-being of the country as a whole, but that is like saying adding onion to your soup is done to make you less hungry. There are numerous facets to the taxation method, and all of them constitute parts of the primary purpose of taxation. In my essay, I expose the most important facets that make up the primary purpose of taxation. (Jones, 1978)

Taxes pay for governments, non-profit services that are required to govern or protect the country, security, and aid to other countries. Sadly, these days, taxes also pay for national debt. Another lesser-understood benefit is the economic development of a country. When speaking of economic development, some people think of massive company bailouts and terms such as “too big to fail,” but there is more to it than that. The act of taxing helps determine where people put their money. For example, if income from savings are not taxed, then more people will save their money, more saving schemes will come into existence, and less money will exist in the consumer marketplace, which will help lower or stabilize inflation. (Salanie, 2011)

Taxing worker earnings is one way of forcing people to take full-time jobs. Let’s say that you only work 20 hours per week. Taking 24% of your earnings may result in you earning a wage that you are unable to live on comfortably. However, if you work 40 hours per week and the government takes 24% of your earnings, you may then have enough to live on more comfortably. Contrast this with a person who works 20 hours per week and is only taxed 2%, such a person may be tempted to stay as a part-time employee rather than getting a full-time job. If everybody did this tomorrow, then it would almost be like halving the country’s workforce. It is usually preferable to have a country full of people who are working full-time jobs to contribute to the Gross domestic product (GDP) of the country. We must also remember that taxes pay for the people who are either unable to work, who do not wish to work and people who are having trouble finding work. (Weber, 2018)

Competing with other countries is vitally important because there are many instances where foreign involvements will dramatically affect the economy of a country. That is why things such as duty taxes exist because they help regulate the flow of goods and services going in and out of a country. For example, if a company decided to charge companies taxes of 75% of the value of whatever they bring into a country, then foreign imports would slow to an almost stop, which would increase the cost of goods in a country for a while until companies start producing goods locally rather than buying from overseas. On the other hand, if no duty taxes were imposed on imports, then local companies would always struggle to compete with lower-priced imports. (Aaron, 2011)

Some people think that taxation is a way of fixing inequalities in wealth and income by taxing people more heavily if they have more money. However, such methods are flawed because it rewards people for working less, which negatively affects an economy, and it removes the incentive for people to strive for excellence or to overachieve. Higher taxes for people who earn more of for people who have more is like punishing people for doing well and working hard. Most right-wing governments will impose higher taxes on people who earn more and have more, but only because they have the means to pay such bills, and not as a punishment for earning more. Taxing people who earn more is also a good way of making them leave the country and have them spend their money in other countries. A classic example of this is from the British musician called Tom Jones, who was paying £0.92 out of every £1.00 he earned under a left-wing government, so he became a citizen of Hawaii. Taxing high earners will inevitably force them to earn less, to move away, or to cheat on their taxes. (Blundell, 1996)

It seems obvious that taxation is not just about paying for non-profit services such as the emergency services, immigration services, vehicle services, etc. Taxation has a massive effect on a country and its economy. As you saw from my examples, if just a few tax numbers change just a little, then it has a massive effect on people and on the country as a whole. My examples used exaggerated figures to make my point (except the Tom Jones figure), but it is obvious that the primary purpose of taxation is to contribute to the well-being of a country, and that this is not simply done with the collection of money, but is also achieved by using taxation as a method of economic control.

Bibliography

Aaron, H., &Boskin, M. J. (Eds.). (2011). The economics of taxation (Vol. 13). Brookings Institution Press.

Blundell, R. (1996). Labour supply and taxation. Oxford University Press.

Jones, G. (1978). The economics of taxation. Philip Allen, Oxford.

Salanié, B. (2011). The economics of taxation. MIT press.

Weber, T. O., Fooken, J., & Herrmann, B. (2014). Behavioural economics and taxation (No. 41). Directorate General Taxation and Customs Union, European Commission.