Four R's

Date: 2015-10-07; view: 465.

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.

The main purpose is revenue: taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems. This is the most widely known function.

The second purpose is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections.

The third purpose of taxation is repricing. Taxes are levied to deal with externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate such policies as implementing a carbon tax.

The fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as the income tax) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.

What Makes a "Good Tax"

Just about every taxpayer complains about the high rate of taxes, yet if one were asked whether they would trade the tax for the removal of service, they would rather pay the tax. In order for taxes to be acceptable, however, they must meet certain criteria. In order for a tax to be successful, it must be equitable, simple, and efficient.

For most people, it is believed that taxes should be impartial and fair. However, there is dispute over the level of equity of a tax. Some believe that a tax is fair only if everyone pays the same amount − a flat tax. Others argue that a tax is only fair if wealthier people pay more than those with lower incomes – a progressive tax. Many also argue over the equity of tax loopholes seeing that they allow some people to get out of paying certain taxes.

Another standard for taxes is simplicity. Tax laws should be written in an intelligible manner so that both the taxpayer and the tax collector can understand them. Though it is not an easy task, people are more willing to pay their taxes if they understand them.

Efficiency is the final principle of taxation. A tax should be easy to administer and to gain money from. The income tax fits into this category. An employer withholds a portion of each employee's pay and then sends a single check to the government on a regular basis. At the end of the year the employer notifies each employee of the amount of tax withheld.