3.2.4 Forms of Taxation

Government spend is ultimately funded by tax receipts.  For any desired level of government spending, the tax must come from somewhere.  The choice of what to tax is partly an economic matter – whatever does least damage to the economy – and partly political: taking account of the unpopularity of the tax and taking account of its relative impact on rich and poor people.  The political sensitivities are discussed later (6.7.1).

In practice taxation has to be levied across the whole of a society, although there may be scope for changing the subsidiarity of tax collection so that more decisions can be taken locally (3.4.5).  Analyses of government tax budgets are often available online, for example:

Ways of levying tax have different economic effects, as examined in the following sub-sections:

  • Wealthy people pay a higher proportion of their income and wealth under systems of ‘progressive’ taxation (3.2.4.1), but ‘regressive’ systems are disadvantageous to the less wealthy.
  • Taxes may be more or less visible to those who pay them (3.2.4.2).
  • Taxation changes people’s behaviour (3.2.4.3), sometimes in unintended ways.
  • Tax exemptions, evasion, and aggressive legal tax avoidance all shift the burden of taxation onto other people (3.2.4.4).
  • Some taxes may be targeted so that poor people don’t pay them (3.2.4.5). The effect, though, is to benefit very wealthy people at the expense of those on middle incomes and especially those whose incomes are just above the threshold.
  • There are limits on how much tax a government can raise in practice (3.2.4.6).

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