FUNCTIONS OF TAXATION

FUNCTIONS OF TAXATION

There are three (3) main functions of taxation which were explained by SIUS (1972:522 -523) as:

a. REVENUE:– A tax extracts money from people or organizations and provides revenue for government.

This makes it possible for individuals to have less money for spending while the government has more to spend.

The reduction in the spending potential of the public sector and the corresponding increase in the potential of the public sector are clearly by power of taxation hence tax was solely introduced to help the government out of financial needs rather than from a public objective of reducing the citizen’s spending power.

b. RESOURCE RE-ALLOCATION:– Tax can alter the product mix generated within the private sector. The imposition of taxes may make certain commodities expensive.

Example includes TOBACCO, LIQUOR etc. whereas the use of subsidies or negative tax could make certain commodities of essential nature less expensive. As a result of this, people will tend to use more of the later group and less of the farmer.

The tax includes charge in the product mix which comes about through the effects of taxes on prices and qualities produced. Also, the potential income tax purposely leaves some gains subject to little or no tax and thereby encouraging source activities.

C. INCOME REDISTRIBUTION: Economic power as measure by income or wealth could be redistributed through the use of taxation. When tax is substantially progressive, it takes an increasing proportion of income.