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The major purpose of taxation is to elevate the revenue to meet the high expenditure of the public. Majority of activities by the government are bound to be financed by taxation although it is not the only objective. To put it simply, taxation has some objectives that are non-revenue as well. Taxation in the contemporary era is used as a tool for planning economic policy. The tool not only influences the volume of production, investment and consumption but also choice of industrial techniques and location, distribution of income and balance of payments amongst others. price stability and control of cyclical fluctuations are also the purpose of taxation.
People pay numerous types of taxes in their daily lives. Three primary types of taxes are there, which include:
Progressive taxes – those having higher income subject to tax have to pay higher average rates
Regressive taxes – opposite to progressive tax, regressive tax means when one has higher income, he or she has to pay lower rate of tax
Proportional and flat taxes – the amount paid in this type of tax isproportion to the amount one has. It is also known as a flat tax.
Apart from that, taxes are also there on income and earning such as:
First objective is economic development –the capital formation is key to economic development, which is garnered through tapping tax revenues.
Second objective is full employment – cutting down the rate of taxes, a country wanting increase its employability could benefit largely.
Third objective is price stability – taxes help control inflation. By increasing the direct taxes level, control on private spending could be made.
Fourth objective is control of cyclical fluctuations – lowering the taxes during depression and increasing them during boon help control fluctuations.
Fifth objective is reduction of balance of payments (BOP) difficulties – custom duties taxes help reduce balance of payments intensity.
The benefit principle is a part of the theory of taxation. According to this theory, taxes that are to be paid for public-goods expenditures must be based on the willingness to pay for the benefits received, which is politically revealed. At times, the benefit principle is associated to the function of prices in assigning private goods. Knut Wicksell and Erik Lindahl, the two Stockholm School economists, had initially developed the principle during the year 1896 to assess the ability of taxes. The principle uses a market-oriented approach to taxation. The primary goal is to determine accurately, the minimum amount of revenue that must be spent on public goods.
The Internal Revenue Code is the law that requires one to pay taxes. In the US, there is a system of voluntary taxation. Under this system, the taxpayers have to calculate the amount they owe to the federal government. The individual taxpayer is expected to comply voluntarily with the country’s tax code. The tax code in the United States functions on the voluntary compliance system. The International Revenue Code determines the tax liability of the individual taxpayer. It is the only law that govern taxpaying in the country.
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