Tax

A tax is a compulsory charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e.g., tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity.

Purposes and effects of taxation

Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out the functions such as:

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• military defense,
• enforcement of law and public order,
• protection of property,
• redistribution of wealth,
• economic infrastructure — roads, legal tender, enforcement of contracts, etc.,
• public works,
• the operation of government itself.

Most modern governments also use taxes to fund welfare and public services, such as:

Related Topics:
Welfare - Public service

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• education systems,
• healthcare systems,
• pensions for the elderly,
• unemployment benefits
• energy, water and waste management systems,
• public transportation.

Colonial states and moderning states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.

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Governments use different kind of taxes and vary the tax rates:

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• to distribute the tax burden between individuals or classes of the population involved in taxable activities, such as business,
• to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled or the retired by taxes on those who are still working,
• to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy) (see also tax exemption),
• to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.

The resource taken from the public through taxation is always somewhat greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules.

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The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since in reality money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls.

Related Topics:
Hypothecation - Finance minister - Fungible

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Some economists, especially neo-classical economists argue that all taxation distorts the market and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimise this distortion. A theory is that the most economically neutral tax is a tax on land. A government's primary duty is to maintain and defend title to land, and therefore it should collect most of its revenues for this unique service. Since governments also resolve commercial disputes, especially in countries with common law, this doctrine is often used to justify a sales tax or value added tax. Others (e.g. libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism, in which the provision of all social services should be a matter of voluntary private contracts.

Related Topics:
Neo-classical economists - Market - Tax on land - Common law - Sales tax - Value added tax - Libertarians - Anarcho-capitalism - Contract

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