What taxes Do

On a basic level, taxes collections provide a revenue source to support the outlays or primary tasks of a government.

You are watching: What is the main purpose of taxation

Key Takeaways

Key PointsTaxes permit the government to perform and carry out services that would not evolve normally through a complimentary market mechanism, because that example, windy parks.Taxes are the primary resource of revenue for many governments.Governments additionally use count to create income equity and also modify consumption decisions.Key Termssales tax: A regional or state tax applied as a percentage of the selling price of items or solutions payable by the customer. The taxation is not known as the seller’s earnings; the seller only collects the tax and transmits the exact same to neighborhood or state authorities.progressive tax: A tax by which the rate rises as the taxable base amount increases.regressive tax: A tax applied in such a manner that the rate decreases as the amount subject to taxes increases.income tax: A taxes levied top top earned and also unearned income, net of enabled deductions.

Taxes room the primary resource of revenue for most governments. They room simply identified as a charge or fee on earnings or commerce. Counting are many readily taken from the view of income taxes or sales tax, although there are numerous other types of counting levied top top both individuals and also firms.

Necessarily, counting raise the price of to buy the great or resource for firms and consumers. As a result, the amount demanded and supplied reaction according to the supply and also demand curves.

Tax Authority

In the united States, Congress has the power to taxation as stated in The United states Constitution, article 1, ar 8, clause 1: “The congress shall have the power to lay and collect Taxes, Duties, Imposts, and Excises to salary the fan and carry out for the typical Defense and also general Welfare that the unified States.” This strength was reinforced in the 16 Amendment to the Constitution: “The conference shall have the strength to lay and collect taxes on income, indigenous whatever source derived, without apportionment amongst the numerous States, and without to the to any type of census or enumeration.”

It is important to note that Congress has delegated come the inner Revenue company (IRS) the duty of administering the taxes laws, well-known as the interior Revenue code (the Code). Congress enacts these taxation laws, and also the IRS enforces them. Separation, personal, instance states also have the power to taxes as execute smaller federal government entities such as towns, cities, counties, and also municipalities.

Purpose that Taxation

On a general level, taxes collections carry out a revenue source to support the outlays or primary tasks of a federal government including yet not restricted to public buildings, military, national parks, and public welfare in the type of move payments. Taxes allow the government to perform and carry out services that would certainly not evolve naturally through a complimentary market mechanism, because that example, publicly parks. However, governments also use taxes to develop income equity and also modify usage decisions.


Income and also Outlays (IRS publishing 2105; Rev 3-2011): taxes revenue is supplied by the government to assistance services and activities obtainable to every residents.

Sources of taxes Revenue: revenue Taxation

Governments use various kinds the taxes and vary the taxes rates. This is done to distribute the tax burden among individuals or class of the population involved in taxable activities, such together business, or come redistribute resources between individuals or great in the population. This form of taxation is referred to as gradual taxation due to the fact that the taxes liability rises in proportion to income.

Sources of taxation Revenue: Sales Taxes

Sales taxes space borne through the consumer when s/he purchases specific goods. The is one ad valorem tax: the charged worth is based on the worth of what is being sold. This is in contrast to an excise tax, whereby the charged worth is based upon the number of items gift sold.

Sales tax is a type of regressive taxation; the liability is based on the percentage of revenue consumed, which is greater for low earnings earners. Together a result, individuals earning a relatively lower revenue will salary a greater proportion of income in the type of sales tax, specifying the regressive nature the the tax. Despite a general revenue source, sales counting are also used to change behavior. For example taxes ~ above cigarettes are meant come dissuade purchase as result of the inherent health implications the smoking.

How Taxes influence Efficiency: Deadweight Losses

In economics, deadweight ns is a loss of financial efficiency the can occur when equilibrium because that a good or business is not Pareto optimal.

Key Takeaways

Key PointsCauses that deadweight ns can incorporate actions that prevent the sector from achieve an equilibrium clearing condition and also include taxes.Deadweight ns can generally be referenced as a loss of surplus to one of two people the consumer, producer, or both.Harberger’s triangle refers to the deadweight loss linked with federal government intervention in a perfect market.Key TermsPareto optimal: relenten a case in i m sorry the profit of one party can not be boosted without to reduce the profit of another.deadweight loss: A lose of economic efficiency that can take place when an equilibrium is not Pareto optimal.

Deadweight Loss

In economics, a deadweight loss (also well-known as excess burden or allocative inefficiency) is a loss of economic efficiency that can happen when equilibrium for a an excellent or service is no Pareto optimal (resource allocation wherein it is impossible to make any type of one individual far better off without making at least one separation, personal, instance worse off). Reasons of deadweight loss can include actions that stop the market from achieving an equilibrium clearing condition (where supply and demand room equal) and include counting or subsidies and binding price ceilings or floors (including minimum wages). Deadweight ns can usually be referenced as a lose of surplus to one of two people the consumer, producer, or both.

Harberger’s Triangle, Taxes, and also Deadweight Loss

Harberger’s triangle, normally attributed come Arnold Harberger, refers to the deadweight ns (as measure up on a supply and also demand graph) associated with government intervention in a perfect market. This can happen through price floors, caps, taxes, tariffs, or quotas. In the instance of a tax on the supplier of a good, the it is provided curve will shift inward in proportion to the tax and resulting in a non-market clearing level the supply. As a result, the price of the great increases and also the quantity easily accessible decreases.


Taxation and also Deadweight Loss: Taxation deserve to be evaluated together a non-market cost. In this instance imposition of taxes reduces supply, leading to the development of deadweight loss (triangle bounded through the need curve and the vertical line representing the after-tax amount supplied), similar to a binding constraint.


Harberger’s Triangle: Deadweight loss, stood for by Harberger’s triangle, is the yellow triangle. The represents lost efficiency.

The area represented by the Harberger’s triangle outcomes from the intersection that the supply and also demand curves over market equilibrium leading to a palliation in customer surplus and producer surplus relative to your value before the imposition that the tax. The loss of the surplus, not recouped by taxation revenues, is deadweight loss.

See more: Who Said, ' Keep Your Friends Close But Your Enemies Closer ?'

Some economists have argued that these triangles do not have a vast impact on the economy, conversely, others keep that they can seriously affect long term economic trends by pivoting the trend downwards, resulting in a magnification of losses in the long run.