The purposes of taxation in a modern economy Taxation has three main roles in a modern economy: (1)The funding of government expenditures; (2)A tool for macro-economic management of the domestic economy; (3)A means of re-distributing wealth from rich to poor. The overall amount of tax revenues is fundamentally a political decision.Government has to balance its own financing needs for its spending programmes with a strategic decision on the balance between the relative size of the public and private sectors in the economy. Once an overall total tax yield has been determined,the specific ways of raising tax revenue have to be considered. One decision concerns the type of tax used.Taxes are either direct or indirect taxes. Direct taxes are those levied on incomes,capital gains and capital transfers;whereas Indirect taxes are applied to expenditures made by individuals and business enterprises. Most countries opt for a combination of these taxes,of which the most important are personal and corporate taxes on incomes,capital gains and capital transfers,value added tax(VAT)and excise duties on specific commodities such as hydrocarbon fuels,alcoholic drinks and tobacco products. Another decision balances the rates of tax against the width of the tax base(i.e.the types of incomes or expenditures to be taxed)。The current trend amongst policy makers is towards creating the largest possible tax base so allowing tax rates to be kept as low as possible. |