Taxation is an essential function of the government. Without taxes, governments will not be able to support various social programs like the development of infrastructure, provide social security, and medical aid to the public.
Tax can reduce how much money a consumer spends or save and every taxpayer has to comply with the set tax rules by the government. Taxes paid includes income tax, sales tax or property tax. Let’s look at the pros and cons of taxation.
1. Source of government revenue: Taxes is a source of government funding and allows the government to spend the money on improving the country’s infrastructure.
2. Wealth redistribution: Taxes help in redistribution of wealth by allowing high-income earners pay more taxes compared to low-income earners. This promotes equality and increases the economy.
3. Local taxes: Federal government and municipal government rely on local income and sales taxes for their development functions like road construction, hospital, and support other social amenities.
4. Keep people out of poverty: Tax payment helps in building a social network which ensures people stay out of poverty. Money contributed through payment of taxes can be used to support the poor.
5. Fair and equitable: Taxes are usually progressive or proportional and each individual is levied based on the ability to pay. Each knows his/her tax liability.
6. Discourage the use of harmful products: Taxing can apply to some products to discourage their consumption. Taxes can be imposed on cigarette smoking and alcohol products to protect public health.
7. Special projects: Taxes paid can support special projects like the improvement of public transport or infrastructure. Taxpayers have the ability to choose which projects to support or not support.
8. Encourage domestic industries: Government imposes a customs duty on imported goods so as to encourage more consumption of products from local industries instead of foreign industries. Those in export business pay fewer taxes.
9. Control inflation: Taxation can be used as a means of controlling demand-pull inflation by increasing various taxation rates. Increasing taxation on various products will limit their consumption.
10. Good credit rating: If companies pay the right amount of taxes, they will receive good credit rating to financial institutions and other agencies.
1. Inhibit economic growth: High taxes may affect the economic growth of the country. The government may initiate tax cuts during economic hardships to encourage consumers spending and growth.
2. Decrease consumer spending: Taxation reduce consumer net income and this makes them have less disposable income for spending.
3. Affects business revenue: Decreased consumer spending has a negative impact on business and puts a lot of pressure on hiring and investments.
4. Increase expenses: Taxation can increase business expenses making it difficult for the business to maximize its profits. There is also increased taxes on business permits and licenses.
5. Encourage outsourcing: High taxes encourage outsourcing of operations abroad affecting employment rate in the country.
6. Wastage of public money: Individuals in charge of the tax collection do not spend the money in a nice way.
7. Discourages savings: Taxation reduce disposable income for individuals and this may reduce their saving habits since little money will be left for spending.
8. Discourage investment: Profits from certain investments may be taxed heavily and this discourages investors from pursuing certain investments.
9. Exploring government power: Taxation can increase the government’s power in controlling citizens due to numerous projects supported. Politics and other special interest groups can affect the running of government projects.
10. False returns: Some people can give false information on their income in order to pay fewer taxes.