Revenue and Taxation:
Modern states have to perform
multifarious duties for promoting the welfare of their citizens. For the
performance of these functions, money is needed. Every government, therefore,
tries to meet its annual expenditure from taxes and from sources other than
taxation. The revenue, of the state can be classified under the following heads.
A tax is a compulsory
contribution to the public authority to
cover the cost of services rendered by state for the general benefit of its
people. In the words of Plehn:
the father of modem political economy, has laid down four
principles or cannons of taxation in his famous book
"Wealth of Nations". These principles are still considered to be
the starting point of sound public finance. Adam Smith's
celebrated cannons of taxation are:
the principles of taxation, it is now easy for us to sum up the
essentials of a good tax system. They, in brief,
are as follows:
The economists have put forward many theories or principles
of taxation at different
times to guide the state as to how justice or equity in taxation can be
achieved. The main theories or principles in brief, are:
While discussing the 'ability to pay theory', we gave a passing
reference to two important systems of taxation, proportional and progressive.
Let us discuss both these systems of taxation in detail.
"Taxable capacity is that
maximum amount which the community is in a position to bear towards the
expenses of public authorities without having a really unhappy and! down-trodden
existence and without dislocating the economic, organization too much".
One of the very important subject of taxation is the problem of
incidence of a tax. By incidence of taxation is meant
final money burden of a tax or final resting place of a tax. It
is the desire of every government that it should secure justice
in taxation, but if it does not know as to who ultimately bears
money burden of a tax or out of whose packet money is received,
it cannot achieve equality in taxation.
There are two main types of taxes (1) direct tax and (2)
According to diffusion theory of taxation, under perfect competition, when a tax is levied, it
gets automatically equitably diffused or absorbed throughout the community.
Advocates of this theory, state that: