Why do governments impose taxes?
Explanation
A government may impose tax for the following reasons:
(i) To raise revenue: Government needs money to carry out its objectives to the citizens. It can generate this money through the imposition of taxes.
(ii) Promotion of economic growth: Taxes can be used to promote economic growth. Government can reduce taxes on company profits so that these profits are ploughed back into business to aid expansion and stability.
(iii) To protect infant industries: Taxes can be used to protect newly established industries from competition with foreign firms.
(iv) To redistribute income: Through the Pay As You Earn (PAYE) system, government can narrow the gap between the rich and the poor by introducing progressive taxation.
(v) Reduction of balance of payment deficit: Taxes on imports can be used to reduce deficits in the balance of payments.
(vi) Employment purposes: Government can manipulate taxation to achieve desired employment levels.
(vii) Influence on consumption: Taxation is used to influence consumption pattern in the desired way.
(viii) Savings: Taxation can be used to encourage savings and investments.
(ix) To discourage dumping
(x) To act as a retaliatory measure in foreign trade.
(xi) Taxation can be used to control inflation.