Reasons For The Imposition of Taxes by the Government and the Economic Effects of Taxation

Reasons For The Imposition of taxes by The government

There are various reasons for the imposition of taxes by the government and we shall look at each reason as outlined below.


1. General Administrative Purposes

The administrative machinery of a country may collapse if there is no money to maintain it; tax therefore forms one of the sources of such money.

2. Defence Purposes

Taxation contributes part of the money used in maintaining a country’s armed forces.

3. The Maintenance of Law and Order

For internal peace and stability of a country to be guaranteed, laws must be made and executed, which require money.

4. Redistribution of Incomes

To achieve this, income tax is made to be progressive in nature.

5. Provision of Social Amenities

Governor uses part of the money generated by taxation in providing social amenities.

6. For Protection of Infant Industries

This is done by heavily taxing foreign-made goods in order to discourage their importation.

7. As a Fiscal Device

Tax is used to counter-act inflation and deflation.

8. To Stop Importation of Harmful Goods

Taxes imposed on such goods are high in order to discourage their importation.

9. To Correct Unfavourable Balance of Payments

This is done by raising tariff to discourage the importation and consumption of foreign-made goods and lowering excise duties in order to encourage the production and consumption of locally-made goods.

10. To Encourage Industrialization

This can be done by reducing or allowing industrialists tax-free period for some time.

The Economic Effects of Taxation

1. It Reduces Production

If excise duties are high, production will be adversely affected.

2. Tax Increases Prices of Goods

The producers will normally try to recover the amount they paid in form of excise duties by raising the prices of goods on which tax was paid.

3. It Reduces The Income of Workers

No matter how small or big an income tax is, it reduces the total income of the worker.

4. It Discourages Savings

The amount one pays as tax may have been what would have constituted the payer’s savings.

5. It Causes Scarcity of Goods

Taxation reduces the quantity of goods produced locally and imported thereby causing scarcity of goods.

6. Results in Inflation

Reduction of direct taxes and increase in indirect taxes will make more money to be in circulation while few goods will be available thereby causing inflation.

7. It March Lead to Deflation

If indirect tax is reduced and direct tax is increased, deflation will be the outcome of such actions.

8. It Will Alter Demand and Supply

Demand and supply will be low because, few goods are produced and their prices high as a result of high indirect taxes.

9. It Discourages Hard work

When Greater portion of one’s income is taken away as tax, the person will not have the zeal to work hard again.

10. Taxation Discourages Investors

Both local and foreign investors will be scared away if there is high taxation especially company and excise duty taxes.

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Oluchi Chukwu

Oluchi is a seasoned Information blogger, content developer and the editor of Nigerian Queries. She is a tech enthusiast who loves reading, writing and research

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