Top 6 Objectives Of Taxation

The main objective of taxation is to increase revenue such that it matches up to the huge public expenditure. The tax must finance a lot of government opportunities. However, it is not the only purpose. In general, the taxation policy includes a few non-revenue objectives.

In the modern world, generally speaking, taxation is usually applied as the basis of economic policy. It plays a significant role in the distribution of income, the balance of payments, choice of industrial techniques and location, investment, consumption, the total volume of production, and so on.

Below, you’ll learn more about the objectives of taxation when it comes to modern public finance.

Tax Preparer Yonnkers1. Full Employment

One of the crucial objectives of taxation is full employment. A country that desires to achieve the aim of full employment should reduce the rate of taxes because the level of employment generally relies on effective demand. As a result, there will be an increase in disposable income and, therefore, an increase in the demand for goods and services. An increase in demand will fuel the investment resulting in employment and income through the multiplier mechanism.

2. Economic Development

The second objective is economic development. Mostly, the growth of capital formation determines the economic development of any given country. It’s is known that capital formation is the pivotal role of economic development. However, there is often a shortage of capital when it comes to LDCs.

To fight the scarcity of capital in these countries, governments tend to mobilize resources such that a quick capital accumulation occurs. Generally, the government often taps into the tax revenues to step up both private and public investment. By following the correct tax planning, there can be an increase in the ratio of savings compared to national income.

The entire capital formation process can be made smooth by imposing new taxes or increasing the existing rate of taxes. One of the fundamental factors of capital formation is the increase of savings to income ratio, in which the taxation policy can effectively increase.

3. Control Of Cyclical Fluctuations

The control of cyclical fluctuations, which includes periods of depression and boom, is regarded as another goal of taxation. In the depression phase, there is a decrease in taxes, whereas there is an increase in taxes during the boom phase to tame the cyclical fluctuations.

4. Price Stability

Taxation can also play a role in ensuring price stability. In general, taxes are considered as an effective method to control inflation. There can be control in private spending by increasing the rate of direct taxes. The pressure on the given commodity market is naturally reduced.

However, imposing indirect taxes on commodities leads to inflationary tendencies. On the other hand, high commodity prices discourage consumption but encourage savings. You should expect the opposite effect with the lowering of taxes during deflation.

5. Decrease Of BOP Difficulties

Taxes such as customs duties are also used to manage the importation of specific goods to reduce the magnitude of the balance of payments difficulties, as well as to support domestic manufacturing of import substitutes.

6. Non-Revenue Objective

Lastly, another non-revenue or extra-revenue objective of taxation is the decrease in inequalities in wealth and income. By launching a system of progressive taxation or by taxing the affluent at a considerably higher rate compared to the poor, this can be done.

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