Tax – a fee or charge imposed by the government on income, wealth, property and

profit of persons and businesses. It can also be levied (collected by the

government) on commodities and services that people buy.

Purpose of Taxation

 The main purpose of taxation is to accumulate funds for the functioning of the

government machineries. No government in the world can run its administrative office

without funds and it has no such system incorporated in itself to generate profit from its

functioning.

 In other words, a government can run its administrative set up only through public

funding which is collected in the form of tax. Therefore, it can be well understood that

the purpose of taxation is very simple and obvious for proper functioning of a state.

Taxes are charges levied against a citizen's personal income or on property or for some

specified activity.

The Four "R"s

Taxation purposes or effects may also be stated into the 4 Rs : Revenue, Redistribution,

Repricing, and Representation.

 Revenue: taxes raise money to spend on roads, schools and hospitals, and on more

indirect government functions like market regulation or justice systems. This is the most

widely known function.

 Redistribution. Normally, this means transferring wealth from the richer sections of

society to poorer sections. This function is widely accepted in most democracies,

although the extent to which this should happen is always controversial.

 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.

 Representation. The fourth consequential effect of taxation in its historical setting has

been the 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.