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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, subsidies, and the operation
of government itself. Governments also use taxes to fund welfare and public
services. A portion of taxes also go to pay off the state's debt and the
interest this debt accumulates. 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 and/or the
values of those in power. To create a system of taxation, a nation must make
choices regarding the distribution of the tax burden¡ªwho will pay taxes and how
much they will pay¡ªand 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 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 the 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.
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.
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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