Reasons For The Imposition of taxes by The government
There are various reasons for the imposition of taxes by the government and we shall look at each reason as outlined below.
1. General Administrative Purposes
The administrative machinery of a country may collapse if there is no money to maintain it; tax therefore forms one of the sources of such money.
2. Defence Purposes
Taxation contributes part of the money used in maintaining a country’s armed forces.
3. The Maintenance of Law and Order
For internal peace and stability of a country to be guaranteed, laws must be made and executed, which require money.
4. Redistribution of Incomes
To achieve this, income tax is made to be progressive in nature.
5. Provision of Social Amenities
Governor uses part of the money generated by taxation in providing social amenities.
6. For Protection of Infant Industries
This is done by heavily taxing foreign-made goods in order to discourage their importation.
7. As a Fiscal Device
Tax is used to counter-act inflation and deflation.
8. To Stop Importation of Harmful Goods
Taxes imposed on such goods are high in order to discourage their importation.
9. To Correct Unfavourable Balance of Payments
This is done by raising tariff to discourage the importation and consumption of foreign-made goods and lowering excise duties in order to encourage the production and consumption of locally-made goods.
10. To Encourage Industrialization
This can be done by reducing or allowing industrialists tax-free period for some time.
The Economic Effects of Taxation
1. It Reduces Production
If excise duties are high, production will be adversely affected.
2. Tax Increases Prices of Goods
The producers will normally try to recover the amount they paid in form of excise duties by raising the prices of goods on which tax was paid.
3. It Reduces The Income of Workers
No matter how small or big an income tax is, it reduces the total income of the worker.
4. It Discourages Savings
The amount one pays as tax may have been what would have constituted the payer’s savings.
5. It Causes Scarcity of Goods
Taxation reduces the quantity of goods produced locally and imported thereby causing scarcity of goods.
6. Results in Inflation
Reduction of direct taxes and increase in indirect taxes will make more money to be in circulation while few goods will be available thereby causing inflation.
7. It May Lead to Deflation
If indirect tax is reduced and direct tax is increased, deflation will be the outcome of such actions.
8. It Will Alter Demand and Supply
Demand and supply will be low because, few goods are produced and their prices high as a result of high indirect taxes.
9. It Discourages Hard work
When Greater portion of one’s income is taken away as tax, the person will not have the zeal to work hard again.
10. Taxation Discourages Investors
Both local and foreign investors will be scared away if there is high taxation especially company and excise duty taxes.