Taxation Overview

Taxation Overview
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Taxation Overview
INTRODUCTION
Justice Oliver Wendell Holmes Jr. stated, "Taxes are the price we pay for a civilized society" (Miller & Maine, 2010). Put in other simple but straightforward terms, ‘Taxation’ refers to the platform by which governments amass financial resources by imposing charges on the general public and businesses to cater for their expenses. Over time, governments have used taxation to advocate for or condemn some trends in economic activity. For instance, increment of tax on certain manufactured goods will discourage their consumption. Additionally, Taxation stands out as an important tool for income distribution among citizens of a country. It facilitates accumulation of funds to establish public goods and services e.g. roads and defense respectively for the good of all citizens. Hence, it can be correctly stated that taxation aims at revenue collection for public expenditure (García-Peñalosa, & Turnovsky, 2011). All the same, it is important to note that there exists a level of shortcomings in using taxation as a tool for income distribution within a country’s setting. This arises because of possibility of incredibly high effective tax rates that would discourage people from working considering a large portion of their earnings will be going to the government. Nonetheless, aside from having notable considerations about taxation of citizens, many policymakers are concerned with the different corporate tax systems existent in the world today. There has been witnessed numerous calls for reforms, especially in regards to international business. As such, it remains significant to review tax systems in both developed and developing countries and the impacts of specific policy options on crucial economic factors and consequently trade within and across borders.
THEORY AND BACKGROUND
This paper seeks to identify and review a number of theories relating to taxation and its impact on people, businesses and governments. One such theory is the Optimal Taxation Theory, which conceives that any given tax system ought to maximize citizens’ social welfare besides having a number of predetermined constraints. This ideology is termed as ‘Optimal Taxation’; it bears a ‘utilitarian approach’, wherein overall social advantage for the majority is of first priority. As such, beneficial utilities for public use should be distributed and supplied equally and without discrimination as a function of income distribution. In fact, the tax system developer (government) is viewed as social planner that has to consider the preferences of citizens as consumers of public goods and services in regards to policy making. As a case in point overview, the theory calls for visualization of members of the public as an economy filled with identical elements in terms of needs and preferences. Therefore, the soc...