Taxation: The Four "R"s

purposes taxation

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.


The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems. This is the most widely known function.

A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections, and this function is widely accepted in most democracies, although the extent to which this should happen is always controversial.

A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax.

A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.


Proportional, progressive, and regressive
An important feature of tax systems is the percentage of the tax burden as it relates to income or consumption. The terms progressive, regressive, and proportional are used to describe the way the rate progresses from low to high, from high to low, or proportionally. The terms describe a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition. A progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases. The opposite of a progressive tax is a regressive tax, where the effective tax rate decreases as the amount to which the rate is applied increases. In between is a proportional tax, where the effective tax rate is fixed as the amount to which the rate is applied increases. The terms can also be used to apply meaning to the taxation of select consumption, such as a tax on luxury goods and the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption and decreases a tax burden on low end consumption.

Direct and Indirect
Taxes are sometimes referred to as direct tax or indirect tax. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. In economics, direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction can be subtle between direct and indirect taxation, but can be important under the law.

Tax burden
Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become embedded into production costs. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence).

To illustrate this relationship, suppose the market price of a product is US$1.00, and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product is a luxury (in the economic sense of the term), a greater portion of the tax will be absorbed by the seller. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price).

Morality
According to many political views, activities funded by taxes can be beneficial to society and progressive taxation can be used in modern nation-states to the benefit of the majority of the population and social development.[7] Most arguments about taxation revolve around the degree and method of taxation and associated government spending, not taxation itself.[citation needed] Some people, however, argue that compulsory taxation itself is inherently immoral, regarding it as theft of property by the government.

Government theft
Because payment of tax is usually compulsory and enforced by the police and justice system, some capitalist political philosophies view taxation by force as institutionalized violence equivalent to theft, accusing the government of levying taxes via coercive means. Libertarians, individualist anarchists, and anarcho-capitalists, see taxation as government aggression (see Zero Aggression Principle). The libertarian writer Jason C. Reeher echoed the sentiments of Murray Rothbard on these grounds; in criticizing his local school district's relatively small property tax increase, Reeher said that "(t)he thief who steals the least is still a thief."[verification needed] Under this view, taxes are paid individually and therefore, to be considered voluntary, in any meaningful way, should be levied only with the consent of the individual. Some libertarians recommend a minimal level of taxation in order to maximize the protection of liberty, while others prefer market alternatives such as private defense agencies, arbitration agencies or voluntary contributions. Others claim that the examples where taxation and the state function of civil protection has collapsed and replaced by private defense agencies (such as in countries like Somalia), the results have been largely positive.

Democratic defense
One counter-argument is that in a democracy, because the government is the party performing the act of imposing taxes, society as a whole decides how the tax system should be organised. The American Revolution's "No taxation without representation" slogan implied this view. The same argument could be made from a monarchist perspective: since the King embodies the nation, the nation as a whole decides how the tax system should be organised. Similar arguments can be made to justify taxation under any form of government, including dictatorships and oligarchies.

According to Ludwig von Mises, "society as a whole" should not make such decisions, due to methodological individualism. Under this view, the moral stature of an act, such as enslavement or theft is not contingent upon its legality or popularity, but rather its morality. Thomas Jefferson argued that, "A direct democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine."

Land Tax defense
Advocates of land tax have the moral advantage of arguing that sovereign rights over the products of labour and capital do not apply to land. John Locke wrote in Essay on Civil Government (1690) that: "When the sacredness of property is talked of, it should be remembered that any such sacredness does not belong in the same degree to landed property." Henry George elaborated this to claim: "Here are two simple principles, both of which are self-evident: I.--That all men have equal rights to the use and enjoyment of the elements provided by Nature. II.--That each man has an exclusive right to the use and enjoyment of what is produced by his own labor" (Protection or Free Trade, 1886).

Justification
Defenders of taxation argue that taxation of business is justified on the grounds that the commercial activity necessarily involves use of publicly established and maintained economic infrastructure, and that businesses are in effect charged for this use. Compulsory taxation of individuals, such as income tax, is argued to be justified on similar grounds, including territorial sovereignty, and the social contract. A libertarian response is that government services used by people are either already paid for directly or are services that ought to be provided by a free market. Such taxes, they argue, are a way for the rulers to exploit the people.

Taxes

What is tax?

A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity. Taxes consist of direct tax or indirect tax, and may be paid in money or as unpaid labour

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