12. Taxation
Few economic topics excite controversy more easily than taxes. While most would agree that neither government nor modern society could survive without collecting them, taxes are more likely criticized than praised.
Taxes are the most important source of revenues for modern governments. Without taxes to finance its activities, governments could not exist. Governments use tax revenues to pay soldiers and police, to build roads and bridges, to control schools and hospitals, to provide food to the poor and medical care to the elderly. Thus the principal purpose of taxes is to pay for the cost of government.
In addition to using taxation to raise money, governments can increase or decrease taxes to achieve social and economic goals. Sometime taxes are levied to protect selected industries by imposing a tariff (a tax on imports), to discourage activities the government believes to be harmful to society or encourage activities which benefit it. Governments can also use its ability to tax to regulate the level of economic activity. To the economists taxation is an important way for maintaining the stability of a nation’s economy.
Governments impose many types of taxes. In most democracies, individuals pay income taxes when they earn money, consumption taxes such as excise tax, sales taxes, and value-added taxes when they spend it, property taxes when they own a home or land, and some others.
Most people would agree that some taxation is necessary, but the question of which taxes and in what amounts can lead to considerable disagreement. In comparing the advantages of one tax over another, it is convenient to focus on the following questions:
Who ought to pay taxes?
What types of taxes are being considered?
Who will actually pay taxes?
Most economists believe that a tax system should follow дотримуватися two main principles: the ability-to-pay principle and the benefits-received principle.
The benefits-received principle of taxation states that those who benefit from a government program are the ones who ought to pay for it. Under this principle public goods are similar to private goods and taxes are the price people must pay for these services. But is it fair to ask low-income families or the disabled to bear the cost of the program designed to help them?
The ability-to-pay principle of taxation states that taxes ought to be paid by those who can best afford them, regardless of the benefits they receive. It means that taxes should be based on taxpayers’ ability to pay that is measured by their income or wealth. On the one hand people with equal opportunities should pay the same amount of tax. On the other hand a person with higher income should pay more in taxes than one with less income. But how much more? Should families with different incomes be taxed at the same rate or at different rates?
Most taxes can be classified as proportional, progressive, or regressive. A proportional tax takes the same percentage of all incomes regardless of size. A progressive tax takes a larger percentage of a higher income and a smaller percentage of a lower income - rich people not only pay a larger amount of money than poor people, but a larger fraction of their incomes. A regressive tax takes a lower percentage of income as income rises - poor people pay a larger share of their incomes in taxes than rich people. Although both sales taxes and value-added taxes are not based on income, they have a regressive effect because they take a larger share of earnings from a low-income taxpayer than from a high-income taxpayer.
Which is fairest - a proportional, progressive, or regressive system? There is no scientific way to resolve this question. The answer depends on whether society has the right to take income from one group of people and redistribute it to another. Most industrialized nations have progressive income tax systems, according to which a higher tax rate is put on larger taxable earnings.
In evaluating a tax it is important to know who really bear a tax burden. The way a tax affects people is called the tax incidence. Incidence refers to the individual or business that will bear the burden of taxes. The incidence of the tax depends on how buyers and sellers of the commodity respond when the tax is imposed.
The burden of paying a tax can be avoided if the amount of tax is passed on to someone else. The process of transferring the tax burden is known as tax-shifting. Taxes passed on to consumers are called shifted forward. Taxes are called shifted backward when suppliers or workers who produced the products are forced to assume the burden of taxes. For example, sales taxes are added to the selling price of a good or service. To put it another way, the incidence of a sales tax is shifted to the final consumers.