Taxes are levied practically upon all persons in the community to cover the cost of the services rendered by the State. A tax is a compulsory contribution which the citizens are required to pay for the services rendered by a public authority.
The essence of a tax, as distinguished from other charges of government, is the absence of a direct quid pro quo between the taxpayer and the public authority.
While levying a tax, it is not the intention of the government to render a service to the tax payer equivalent to the amount of the tax paid by him. In other words, you cannot refuse to pay a tax on the plea that you do not use a service.
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Taxes are usually classified into direct or indirect, although these classifications are sometimes overlapping and are not always mutually exclusive. Direct taxes are those paid by the individual directly on the basis of his possession or receipt of property.
They may be based on real or personal property, tangible or intangible, owned at a specified time, or received during a specified period. Indirect taxes are those which are levied on particular articles, or transactions, and which may be bome by others than those from whom the tax collector receives payment.
As to the nature of taxation in general several theories have, at different times, been advanced.
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(i) One of the earlier theories was that the contribution made by every citizen to meet the expenditure of the State should be proportionate to the benefits received by him from the State.
A tax was, accordingly, regarded as a payment made by each individual in return for benefits received from government. There was, as such, a direct quid pro quo in a tax.
The benefit theory is held to be unjust and impracticable. It is obviously inconceivable that the weakest members of the society, who may be assured to benefit most from the services of the State, should be made to pay the heaviest contribution.
But as Bastable points out, “If security is to be sold like an ordinary commodity, there ought, on the strictest commercial principles, to be some allowance made to the purchaser of a large quantity.”
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(ii) The exponents of the Financial Theory are not concerned with equity. They aim exclusively at obtaining the necessary revenues as expeditiously and as cheaply as possible.
The aim of the public finance is, thus, to raise the largest sum of money with the least trouble. Accordingly, each person should pay in proportion to his income, of course, the rich paying more than the poor.
Closely connected with it is the “cynical” theory of taxation. The advocates of this theory attempt to secure the needed revenue in such a way as to encounter the maximum taxation with least opposition.
It is maintained that any tax is good which yields a large income with comparatively little protest. This policy of taxation is consistent with the maxim attributed to the French Minister Colbert: “Pluck the goose with as little squealing as possible.”
(iii) According to the Social-political theory a tax is regarded as an instrument for attaining an economic or social end, such as reduction in the inequalities of income, or fostering of certain industries.
The advocates of this theory deliberately use the fiscal machine to reduce the gap between high and low incomes, or would employ tariffs and such other measures as a means of stimulating production.
(iv) Taxation is frequently advocated to restrict the consumption of luxuries or of noxious articles and, as such, sumptuary theory explains the nature of taxation. The object in such a kind of taxation is moral.
It is impossible to devise a system of taxation which may satisfy different points of view as to the nature of taxation. Nor is it possible to devise a single system of taxation which would be regarded as satisfactory from the point of view of both the tax-payer and the State exchequer.
All modem States adopt a mixed system of taxation including both direct and indirect taxes, spread over property, income and consumption, the whole system conforming, as far as possible, to the various canons of taxation discussed hereafter.
It is true that the enormous expenditure of modem governments necessitates that the system of taxation should be productive from the point of view of the government. But the principle of equity cannot be disregarded.
A tax should not be devised in a manner which affects adversely the productivity of the tax-payer. Nor should it entail a heavier burden on the poor and a lighter one for the rich.
It must be consisted with the principle of the ability to pay, which naturally means that the people with higher incomes should be called upon to pay higher taxes. “Justice between the various classes is essential so far as it can be attained, and taxation which conforms to the general principle of equity is to be favoured even though it may not yield the maximum economic benefit.”
Nevertheless, it is impossible to devise a system of taxation which will satisfy classes and individuals in the multitude of different circumstances which may exist in modem society.
There are always some cases in which conditions make the burden of taxation press more heavily than it would in other circumstances. It is, however, more politic and satisfactory to adopt certain general principles to meet each individual case.
This will mean less inconvenience and fewer hardships. The best tax systems are based on one principle; they are usually a compromise between a numbers of systems, and have been devised as the result of long experience and careful consideration of the peculiar needs of the community concerned.