16.Taxes and taxation

Taxes are the compulsory financial contribution by a person or body of persons towards the expenditure of a public authority. In modern economies taxes are the most important source of government revenues.

Taxes have 3 functions:

1)fiscal or budgetary, to cover government expenditure, to provide the public authorities with the revenue required for meeting the cost of defence, social services, interest payments on national debt, municipal services, etc;

2)economic, to give effect to economic policy, to promote stable economic growth, to influence the rate of economic growth of the nation;

3)social, to increase the economic welfare of the community, to lessen inequalities in the distribution of income and wealth.

Taxes may be direct or indirect. For example, taxes on income and on capital are known as direct; taxes on commodities or services are known as indirect.

Taxes may be proportional, progressive and regressive.

A proportional tax is one that imposes the same percentage rate of taxation¹ on everyone, no matter what their income.

A progressive tax is one that imposes a higher percentage rate of taxation of people with high incomes than on those with low incomes.

A regressive tax is one that imposes a higher percentage rate of taxation on low incomes than on high incomes.

17. Taxation

In order to have an effective tax system, government must have criteria or standards. One such criterion is that a tax yields enough revenue.

A second criterion is clarity. Tax laws should be written so that both the taxpayer and tax-collector can understand them. This is not an easy task but people seem to be more willing to pay taxes¹, when they understand them. A third criterion is ease of administration. A tax should be easy to collect. It should not require a large enforcement staff, and it should be designed so that citizens find it hard to avoid. This criterion also includes convenience and efficiency. That is the tax should be administered at the lowest possible cost. A final criterion is fairness. Taxes should be imposed justly. However, this is hard to do because people do not always agree about what is or is not fair when it comes to taxes².

In general taxes are based chiefly on two principles: the Benefit Principle³ and the Ability-to-Pay Principle⁴.

The Benefit Principle of taxation is based on two ideas. First, those who benefit from government services should be the ones to pay for them. Second, people should pay taxes in proportion to the amount of services or benefits they receive.

The Ability-to-Pay Principle of taxation says that people should be taxed according to their ability to pay, no matter what benefits or services they receive. This principle is based on three things. First it is not possible to measure benefits, derived from government spending. Second, people with higher incomes suffer less discomfort than people with lower incomes even if they pay higher taxes. Finally, the only means most people have of paying taxes is the income they earn. Since the benefits of government services to individuals are hard to measure, the other basis for distributing taxes is income.

1. ... people seem to be more willing to pay taxes — ... здається, що люди з більшою охотою платитимуть податки

2. ... when it comes to taxes — ... коли йдеться про податки

3. Benefit Principle — пільговий принцип

4. Ability-to-Pay Principle — принцип платоспроможності