Taxes- Role

TAX-ROLE

Tax is an important source of revenue to the state. Taxes by transferring income from individual to government,reduce the purchasing power of individual and so are capable of altering the pattern of private consumption and investment and thus of national income.

The role of taxation, particularly in developing or underdeveloped country are given below:

a)Important consideration:Some important consideration are to be kept in mind:

•Objectives of tax are closely connected with the overall economic as well as non - economic policies of gov,non tax component of fiscal policy and institutional and other conditions in the economy.

•Objectives of tax differ between developed and underdeveloped countries.

•Taxes are contradictory to each other.

b)Developed country:A developed country is faced with the problem of cyclical fluctuations in income and employment. There is regular occurrence of booms and depression. In such a situation, taxes should be used to produce anticyclical effects. They should be reduced to counteract depression and increased during boom period to control inflationary the tendencies.

c) Underdeveloped countries:In underdeveloped country the basic problem is not of instability of income and employment. Here,the economy is faced with the problem of economic growth,poverty ,chronic unemployment,income inequalities etc. The objectives of tax in underdeveloped therefore is to break Circle of poverty, to promote capital formation, to mobilize economic surplus,to control inflationary , to reduce regional disparities.

d) Breaking vicious circle of poverty:The greatest need of an underdeveloped country is to break the vicious circle of poverty and bring about an increase in production level . Through careful use of tax and public expenditure ,the government can promote economic development and bring about better distribution of income.

e)To mobilise economic surplus:A sound tax should mobilise economic surplus currently generated in economy. Economic surplus is the difference between actual current output and actual current consumption. The tax policy is to mobilise economic surplus and direct it into productive channels.

f)To provide incentives to work,save and invest:In developing economy,tax should be used to provide incentives to work ,save and invest for accelerating the pace of economic development. The basic problem in an Underdeveloped country is scarcity of capital and slow rare of capital formation. Tax should provide incentives to all those who save to invest and to those who are already investment minded to invest more in productive enterprises.

g)To mobilise increase in surplus:I'm developing economy mobilising the existing surplus is not enough . What is required is to mobilise the increase in surplus that arise as a result of initial economic development. For this purpose,taxation should be designed so as to prevent consumption from increasing in same ratio as increase in income.

h)Broadening the base:It is necessary to broaden the base of tax system by requiring each and every person to make contribution to revenue to state in accordance with his ability to pay. In such economy,even the poor should pay tax and thus contribute to economic development.

I)To control inflation:Another role of tax is to control inflationary tendencies resulting from higher development expenditure. Taxes should not only increase with increase in investment,they should Also be levied at such points as are particularly benefitted by higher public investment.

j)Better distribution:Tax should help in bringing about better distribution of income,thus leading to reduction in inequalities of income and wealth. The best tax is to reduce inequalities of income is progressive tax,the rate of which increases with every increase in income. In such a tax system persons getting more income will pay more than getting less income.

k)To reduce regional disparities:Taxes may also be used to reduce disparities in country, tax diverts resources from one place to another.

l)To inspire public confidence:A good tax system should be able to inspire public confidence in fiscal policy of government . No tax payer should feel that he is required to bear more than his due share of tax burden . The tax payers should be confident that money paid by then us wisely spent.

LIMITATIONS

a)Various conditions and institutions such as paucity of data , level of education ,cultural pattern restrict the adoption of tax system.

b)Many taxes work at cross purposes.An equitable and progressive tax system discourage savings and capital accumulation.

c)The existence of dual economy also poses problems in adopting an efficient and optimum tax structure.

d)One should not ignore limitations of administrative machinery. It is of no use to have tax which cannot be administered properly.

e)A tax system should also be politically acceptable.