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Money provided by taxation has been used by states and their
functional equivalents throughout history to carry out many
functions. Some of these include expenditures on war, the
enforcement of
law
and
public order, protection of
property, economic infrastructure (roads,
legal tender, enforcement of contracts, etc.),
public works,
social engineering, and the operation of government itself.
Governments also use taxes to fund
welfare and
public services. These services can include
education systems,
health care systems,
pensions for the elderly,
unemployment benefits, and
public transportation.
Energy,
water and
waste management systems are also common
public utilities. Colonial and modernizing states have also
used cash taxes to draw or force reluctant subsistence producers
into cash economies.
Governments use different kinds of taxes and vary the tax
rates. This is done to distribute the tax burden among individuals
or classes of the population involved in taxable activities, such
as
business, or to redistribute resources between individuals or
classes in the population. Historically, the
nobility were supported by taxes on the poor; modern
social security systems are intended to support the poor, the
disabled, or the retired by taxes on those who are still working.
In addition, taxes are applied to fund foreign aid and military
ventures, to influence the
macroeconomic performance of the economy (the government's
strategy for doing this is called its
fiscal policy; see also
tax exemption), or to modify patterns of consumption or
employment within an economy, by making some classes of
transaction more or less attractive.
A nation's tax system is often a reflection of its communal
values or/and the values of those in power. To create a system of
taxation, a nation must make choices regarding the distribution of
the tax burden—who will pay taxes and how much they will pay—and
how the taxes collected will be spent. In democratic nations where
the public elects those in charge of establishing the tax system,
these choices reflect the type of community that the public and/or
government wishes to create. In countries where the public does
not have a significant amount of influence over the system of
taxation, that system may be more of a reflection on the values of
those in power.
All large businesses incur administrative costs in the process
of delivering revenue collected from customers to the suppliers of
the goods or services being purchased. Taxation is no different,
the resource collected from the public through taxation is always
greater than the amount which can be used by the government. The
difference is called
compliance cost, and includes for example the labour cost and
other expenses incurred in complying with tax laws and rules. The
collection of a tax in order to spend it on a specified purpose,
for example collecting a tax on alcohol to pay directly for
alcoholism rehabilitation centres, is called
hypothecation. This practice is often disliked by
finance ministers, since it reduces their freedom of action.
Some economic theorists consider the concept to be intellectually
dishonest since, in reality, money is
fungible. Furthermore, it often happens that taxes or excises
initially levied to fund some specific government programs are
then later diverted to the government general fund. In some cases,
such taxes are collected in fundamentally inefficient ways, for
example highway tolls, this is also true of privately funded
roads.
Some economists, especially
neo-classical economists, argue that all taxation creates
market distortion and results in economic inefficiency. They
have therefore sought to identify the kind of tax system that
would minimize this distortion. Also, one of every government's
most fundamental duties is to administer possession and use of
land in the geographic area over which it is sovereign, and it is
considered economically efficient for government to recover for
public purposes the additional value it creates by providing this
unique service.
Since governments also resolve commercial disputes, especially
in countries with
common law, similar arguments are sometimes used to justify a
sales tax or
value added tax. Others (e.g.
libertarians) argue that most or all forms of taxes are
immoral due to their involuntary (and therefore eventually
coercive/violent) nature. The most extreme anti-tax view is
anarcho-capitalism, in which the provision of
all social services should be
voluntarily bought by the person(s) using them.
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