Taxation is a means by which governments finance their expenditure by imposing charges on citizens and corporate entities. The main purpose of taxation is to accumulate funds for the functioning of the government machineries. All governments in the world cannot run its administrative office without funds and it has no such system incorporated in itself to generate profit from its functioning. In other words, a government can run its administrative set up only through public funding which is collected in the form of tax. Therefore, it can be well understood that the purpose of taxation is very simple and obvious for proper functioning of a state. Taxes are charges levied against a citizen’s personal income or on property or for some specified activity. As such, one purpose of taxation is to increase in effectiveness and productivity of the nation as government is able to implement various socio-economic development projects such as the construction of roads and bridges, schools, health facilities and provision of social services.
Another reason is that taxation assists in reducing consumption of unwanted goods. Taxes as such can be used as an effective tool to reduce the consumption of unwanted goods like alcohol. Higher taxes on such goods reduce the consumption as the price of the product will be very high for the consumers. Government also uses taxes as a way to protect local industries and as such make them more profitable. Increasing tariffs on imports and charging lower taxes to local products may boost the demand for goods and services produced by domestic industry. Taxes on imports, which are called tariffs, can be used by government to correct an unfavorable balance of payment situation by increasing the tariffs. This will result in imports becoming expensive and will cause a fall in demand for the imported goods.