Objectives behind Taxation

The main objective of taxation is to fund government expenditure. But it is not the only objective, taxation policy has some non-revenue objectives. These objectives are:

  • Economic development – Resource mobilization for economic development is done through taxation. To step up both public and private investment, government taps tax revenues. Through proper tax planning, the ratio of savings to national income can be raised.
  • Income redistribution through taxes is meant to reduce inequalities in the distribution of income and wealth.
  • Employment depends on effective demand. A country desirous of achieving the goal of full employment must cut down the rate of taxes. Consequently, disposable income will rise and, hence, demand for goods and services will rise. Increased demand will stimulate investment leading to a rise in income and employment through the multiplier mechanism.
  • Price stability, through taxes, is an effective means of controlling inflation. By raising the rate of direct taxes, private spending can be controlled. Thus, the pressure on the commodity market is reduced. But, indirect taxes imposed on commodities fuel inflationary tendencies. High commodity prices, on the one hand, discourage consumption and, on the other hand, encourage saving. The opposite effect will occur when taxes are lowered down during deflation.