A tax is defined as a compulsory contribution to the government from its citizens that is used to pay for expenses incurred for the common interest of all persons without reference to any special benefits being conferred to the payers.
The above definition points out or encompasses three main characteristics of tax
- Tax is not levied for a return for a specific service rendered by government to tax payers. An individual cannot ask for any special benefit from the government in return for the tax paid. It is referred to as a non- quid pro quo payment
- It is a compulsory contribution imposed by the government on people or companies. Because of its compulsory nature, those who do not pay it are reliable to being punished but it is to be paid by those who come under its jurisdiction
- It is a payment by tax payers which is used to benefit all the citizens a case in point the government use the collected revenues to establish infrastructures such as hospitals, schools as well as other public utility services.
Purposes of taxation
Taxes are mostly levied with the objective of raising public revenue. However there are other subsidiary purposes of taxation.
a) Raise Public Revenue (discussed above)
b) Economic Stability
Taxes are imposed with a purpose of maintaining economic stability I that during inflation, the government increases the levels of taxation to discourage unnecessary expenditure and take away excess money supply. In times of depression, the government reduces the level of taxation to encourage individuals to spend more. In this way, taxes become an important tool of economic stability.
c) Fair Distribution of Resources / Incomes
Taxes are imposed to achieve equality in the distribution of national income. Taxes are imposed at higher rates on those people with higher disposal income and used to provide welfare facilities to poor people. In this way, taxes become a vehicle for the redistribution of national resources.
d) Protection Policy
Taxes are imposed to implement the protection policy of the government. In order to give protection to commodities produced in the country, the government raises taxes on imports. This causes such imports to be more expensive and thus people will resort to locally manufactured goods that may subsequently boost local infant industries.
e) Social Welfare
Taxes are imposed on the production, consumption and importation of commodities, which are harmful to human health e.g. the customs and excise duties on cigarettes, beer, cosmetics and other harmful products. This raises their prices and discourages their production and consumption.