Taxation is simply the imposition of mandatory levies on organizations and individuals by the government. Tax is collected in virtually every nation around the world, mainly to increase revenue for expenditure, though they serve other objectives as well.
Taxation is intended primarily to contribute to the welfare of the whole country. The system of taxation consists of many aspects, all of which form parts of the main purpose of its existence. In this essay, the key aspects of the primary purpose of taxation are illustrated.
Tax is paid for the government's non-profit agencies, required to regulate or safeguard the nation, and also to provide safety and assistance to other nations. Unfortunately, taxes pay for national debt these days, too. The economic growth of a nation is yet another undervalued advantage.
Many people think about large businesses' upgrades while talking about economic growth, but it goes far beyond that. Taxation, in real sense, helps to decide where people put their cash. For instance, saved income that is not taxed will make people save more money, contribute to more investment programs and there will be less spending on the consumer market and that tends to stabilize or reduce inflation (Salanie, 2011).
Taxation is used as a method for economic policy in the world today. This influences production volume, investment, consumption, selection of locations and techniques of business, income distribution, the balance of payments, etc. Taxation helps reduce unnecessary consumption of products. Higher tax rates on such products would reduce demand as the cost would be too high for consumers.
The government also uses taxes to safeguard and make local industries more profit-oriented. Increased import taxes and lower taxes on local products can increase demand for domestic products and services. The government can use taxes on imports to acquire extra funds that would balance the financial record. The result reduces dependence on imported goods as the prices of those imported goods skyrocket as a result of higher tax rates.
Economic development is one of the essential goals of taxation. Every country's economic development is largely influenced by capital formation growth. Capital formation is said to be the key to economic growth. Nevertheless, local domestic companies also face a capital shortage.
To reduce the negative effects as a result of a lack of capital, these nations’ governments organize resources to accumulate capital quickly. Government tax revenues are used to increase private and public investment. The percentage of savings to national revenue can be increased by proper tax strategy.
The system of capital formation can be straightened by introducing new taxes or by increasing the current tax rates. The increase of the income ratio, which can be efficiently increased by tax policy, is a big part of economic growth.
The investment must, however, be given proper attention. In the inefficient economic sectors, economic resources or investments may threaten economic growth. Economic growth may be undermined, even when saving and investment rates are improved. The tax policy will also be used to invest in the competitive sectors of the economy, particularly the infrastructural industries.
To ensure stable prices, taxes can be introduced. Taxes are seen as a way to control inflation efficiently. Private expenditure can be regulated by increasing the price of direct taxes. The pressures on the product's market are, of course, decreased.
Nevertheless, indirect taxes levied on goods boost the likelihood of inflation. High prices of goods dissuade consumption on one hand and promote savings on the other. If taxes are reduced through a recession, the reverse effect happens.
Many claim that higher taxes contribute to lower employment, through reducing the availability of capital for businesses or decreasing the money available for consumers to buy products and services with, thereby resulting in business losses for manufacturers of these products and services while others claim that higher taxes result in higher employment, as governments employ their workers with the tax revenues generated.
Because the rate of employment relies on efficient demand, taxation must be reduced by a country that wants to achieve its objective of high employment. Accordingly, supply will increase and labor supply will also grow. Higher demand would boost production which, through the multiplier process, will increase revenues and employment.
Many believe that taxation helps reduce income and wealth inequality by placing higher taxes on people with more money. But these approaches are faulty because they compensate a person for working less and that reduces opportunities to aim for supremacy or achieve perfection. Higher taxes on those who earn more are like punishing them for working so hard. Most governments would tax more individuals, but just because they possess the resources to pay such expenses and not as a penalty for making much money.
Taxing people with higher incomes is a successful strategy to get them to go out of the country and spend their income elsewhere. Taxing high-wage individuals would eventually cause them to save less, travel abroad or abuse the tax methods.
Taxation is not only about funding non-profit organizations like vehicle services, immigration services, emergency services, etc. A country and its economies are heavily impacted by taxes. The impact on individuals and the entire country would be immense if only there would be adjustments in the tax rates imposed by governments.
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