Purposes/reasons for taxation

Business studies study module
  1. Raising revenue for government expenditure. This is the main reason for taxation.
  2. Discouraging /controlling consumption of certain commodities e.g. alcohol and cigarattes which are considered to be harmful.
  3. Discouraging importation of certain commodities in order to protect local industries. This is done by imposing heavy taxes on such commodities.
  4. Controlling inflation. Taxation reduces money supply by reducing peoples ‘disposable’ income thereby controlling inflation.
  5. Reducing inequality in income distribution; this is done by taxing the rich heavily and using the finances raised in provision of goods and services that benefit the poor.
  6. Influencing locations of businesses. This is done by taxing businesses located in urban areas heavily and those in rural areas lightly hence businesses moving to rural areas.
  7. Correcting unfavorable balance of payments. High taxes are imposed on imported commodities thereby discouraging their importation leading to an improvement in the balance of payments.
  8. To protect the key selectors of the economy such as the agricultural sector, by stimulating their growth.

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