Tax Purposes

March 17, 2009

The Four “R”s

Basically, taxation has four main purposes also identified as tax effects. They are: Revenue, Redistribution, Repricing and Representation.


Revenue

The main tax purpose is revenue. Tax revenue is the government’s income from taxpayers. Through taxation, the government raises money to fund activities such as repairing roads, and also raises funds for hospitals and schools. Similarly, the revenue collected indirectly finances government functions such as regulation of market or the justice systems.

The government’s net income or profits generally entails the total revenue minus the total expenses over a given period of time. Government revenue includes proceeds from imposed income taxes on individuals and companies, sales of goods and services, custom duties, interests and dividends. Many countries refer to revenue as turnover.

In economics, revenue as a whole is all income received by an institution or organization in the form of cash or equivalents of cash. In a more official usage, revenue is an estimation of income based on rules set by a government or government agencies, or it can be based on a specific normal accounting practice.

Redistribution

The second tax purpose or effect is redistribution. In simple terms, redistribution usually means the transfer of wealth from rich parts of a certain society to poorer sections of the same society. On the other hand, redistribution in economics can be defined in simple terms as transferring income, property or wealth from certain individuals to others.

Redistribution takes place in three main forms, wealth, income and property. Wealth redistribution is whereby assets are apprehended and redistributed from one entity to another with the aim of achieving an economical equality. On the other hand, the term property redistribution entails political procedures that involve taxation or property expropriation. It can also mean imposing regulations that will make property owners avail their property for use by others.





Still on point, income redistribution aims at creating a permitted even amount of income that individuals are supposed to earn, with the aim of correcting ineptitude of a market economy to be able to remunerate an individual based on the amount of labor they expend.

Redistribution is based on the fact that the rich members of the society have no obligation to help the poor, therefore, to create a financially democratic society, any form of wealth should be redistributed.

Repricing

The third tax purpose is repricing. Fundamentally, taxation is imposed with the aim of addressing externalities. For instance, the reason why tobacco is heavily taxed is mainly to discourage smoking which is harmful to human health. Subsidies and taxes definitely change the price of goods, consequently changing the quantity and rate of consumption.

This is to say that when a marginal tax is imposed on goods, and when all variables remain the same, the price of the goods paid by the end users, which in this case equals the new market price, will increase while the price received by the sellers of the same goods will substantially decrease.





On the other hand, when marginal tax is imposed on goods consumption, and all other variables remain the same, the good’s price paid by consumers will decrease and the price received by the sellers will escalate and the sellers price will then become the new market price.

Representation

The final tax purpose is representation which is echoed clearly from the times of the American Revolution on the slogan “no taxation without representation”. In simple terms, the slogan, and representation in general implies that as rulers impose taxes on the general public, the rulers owe the people accountability. With time, it has been established that direct taxation gives the best accountability degree which translates to good governance, whereas indirect taxation have less tangible effects.

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Written by Uncle Sam · Filed Under Taxation 

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