A tax is a mandatory financial charge which is a contribution to state revenue. It is a charge that is levied on individuals or corporations by a governmental organization. The main purpose of taxes is to fund government spending and various public expenditures. Usually, the Government decided the rates and the items on which tax will be charged. Tax is a controversial economic issue therefore it has both pros and cons that people agree and disagrees with depending on their personal opinions.
- Taxation is a very important economic function of a government
- There are various types of taxes available like income tax, property tax, sales tax, etc.
- One of the key advantages of taxes is that they allow the government to collect money for basic operations
- Another advantage of taxes is it redistribute wealth between taxpayers and individuals who require financial help from the government
The Advantages & Disadvantages of Taxation (in Economy, Sales, Consumptions & Incomes)
|Serial||Advantages of Tax||Disadvantages of Tax|
|1.||Tax is an important function of the economic system of a government||Taxes have a bad effect on consumer spending and they can demotivate people to spend money|
|2.||The government collects tax to fund their basic operations||Tax increases the price of various products and it results in an increase in the living cost of common people|
|3.||Tax helps the government to pay the debt||Because of the over-taxation companies, lose revenue and it creates a bad impact on the overall economic condition of a country|
|4.||The tax provides a budget for common Defence and general Welfare of the people of a country||Taxation increases the expenses of the business that results in the high sell price for their products|
|5.||Tax redistribute wealth between taxpayers and individuals||More tax means more money for the government and more money means more power for the government|
|6.||Tax helps the government to provide supports to lower-income and middle-class citizens||The funds collected from tax can be influenced by politics and special interest groups which will hinder the development of a country|
|7.||Various taxation reduce or discourage consumption of different products||According to many experts, tax punishes success and demotivated people to earn more money|
|8.||Tax protects various products from overconsumption||Taxation results in the decrease of disposable income of the taxpayers|
|9.||Various local taxes help the local authority to form the budget and maintain their basic operations||Excessive taxation increases the recession and unemployment problem of a country|
Pros Of Taxes
Taxation is a very important economic function of a government. There are various types of taxes the taxpayers pay that include income tax, property tax, sales tax, etc. Now below are some importance of taxes in the development of a country.
One of the key advantages of taxes is that they allow the government to collect money for basic operations. According to Article I, Section 8 of the U.S. Constitution, the reasons for the USA government to collect taxes are –
The Congress shall have Power To lay and collect Taxes, Duties, Imposts, and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts, and Excises shall be uniform throughout the United States;
To borrow Money on the credit of the United States;
To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;
To establish a uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;
To establish Post Offices and post Roads;
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;
To constitute Tribunals inferior to the Supreme Court;
To define and punish Piracies and Felonies committed on the high Seas, and Offences against the Law of Nations;
To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;
To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;
To provide and maintain a Navy;
To make Rules for the Government and Regulation of the land and naval Forces;
To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;
To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;
To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the Acceptance of Congress, become the Seat of Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings;
To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or any Department or Officer thereof.
Another advantage of taxes is, they redistribute wealth between taxpayers and individuals who require financial help from the government. Here, the Federal income tax is progressive taxes and it means the wealthier you are, the higher proportional amount of taxes you have to pay. So it provides a financial balance between the rich and poor people. This type of tax promotes greater economic and social equality in society. In this tax program, the wealthiest taxpayers contribute money for programs that support lower-income and middle-class citizens as well the basic services that all taxpayers have equal access to.
Some taxes only apply to certain types of products to reduce or discourage consumption. For example, the main purpose of tax implantation on alcohol and cigarettes is to reduce their use. The higher the tax rate, the higher the price of the product will be so people will be demotivated to buy these products. Moreover, these types of taxes also fund various campaigns that benefit public health. Many states in the USA imply gasoline taxes to reduce the demand for gas and keep the international demand for oil in check. So taxes also protect various products from overconsumption.
All the state and municipal governments hugely depend on local income and sales taxes to maintain their basic function and form the budget. Many state governments also implement a property tax to collect money. These taxes fund everything from fire departments and road construction to public schools. Moreover, there are many Municipalities that lower the taxes to encourage population growth and it can be an advantage for the local economy.
Cons Of Taxes
Governments impose taxes to cover their expenses and finance projects but taxes have some disadvantages too. Usually, the tax is implemented at the local, state, and federal levels on income, sales, property, and other activities. However, sometimes over the implementation of taxes can cause a bad affect on the economic development of a country. Here are some disadvantages of taxes –
Bad Effect On Consumer Spending
Taxation creates a bad effect on consumer spending and sometimes taxes decrease consumer spending. Taxes mean an increase in the price of products so it will demotivate the consumer to buy the products and eventually it will hinder the economic progress of a country. The lower consumption of goods decreases the revenue of a company which can put negative pressure on hiring people and new investment. Therefore, sometimes government reduces the tax in the time of economic hardship to encourage spending and boost the economy. Many financial experts consider taxes as a discouragement to work since they decrease the direct financial reward of earning income.
Increase Business Expenses
Another key disadvantage of taxes is; it increases the business expenses. So it makes it more difficult for a business to achieve profitability. A business has to pay different types of taxes including payroll taxes, property taxes, business taxes, as well as various fees for permits and licenses. All these expenditures mean the business has to set a high sell price for their products. Moreover, a high sell price means a decrease in consumer spending, and a decrease in consumer spending means low revenue for the business. If a business is not able to make a large profit then it becomes very difficult for the business to maintain all its expenses.
Increase Of Government Power
Taxation increases the power of a government because if the government has more budgets then it can support more programs. Therefore, the opposite party argues that the private sector should allocate the resources than the government agencies. Moreover, the Government agencies might be influenced by politics and special interest groups so the proper distribution of budgets might not be possible. So it’s the responsibility of the government to ensure the proper distribution of budgets.
Taxes Punishes Success
The progressive tax system like the federal income tax ensures wealthier people pay more tax and poor people pay fewer taxes. This type of tax is considered as a “redistribution of wealth” but sometimes it creates discrimination. In this type of tax system, some people benefit more from government programs than others do. In many USA states, a high-income individual might face a top federal tax rate of 37 percent and as much as an additional 13.3 percent in high-tax states such as California. On the other hand, an underemployed worker doesn’t have to pay any income tax and they also receive financial assistance from the government. So according to many Critics, a progressive tax system punishes successful and demotivated people.
Taxation is a very complex system and if it is not implemented properly then it can damage the economic growth of a country very badly. On the other hand, proper taxation can boost the financial development of a country. So the tax authority should be more careful in deciding the tax rates and they must find the right tax rate which is best for the government, individuals, and businesses.
Last Updated on October 26, 2022 by Magalie D.
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.