What is the Importance of Taxation?

Tax is very pivotal in attaining growth and development in any known human society in that help provide basic infrastructures and social amenities for the people. Hence, the various tiers of government resort to the use of tax in ensuring they provide their social will to the people they governed.

The persistent decrease in the price of crude oil has led to the increase in the consciousness on the importance of tax as an important source of revenue. Tax is very pivotal in attaining growth and development in any known human society in that help provide basic infrastructures and social amenities for the people.

Taxation ensures that the Government secures a stable flow of revenue which is employed in providing infrastructure, creating employment and growing investment, among other things, which ultimately improves the well-being of the citizens.

Unlike other revenue generation sources such as levies, charges, and fees, the tax system assured stability and certainty.

Hence, the various tiers of government resort to the use of tax in ensuring they provide their social will to the people they governed. This academic write-up however focuses importance of tax and taxation system is geared towards growth and development state.

Taxation is a veritable tool for sustainable national development.

In some state, governments across the three tiers use the revenue generated from taxation to provide the needed goods and services for the people. This article will highlight the importance of taxation in general and to Businesses  

Importance of taxation

1. Sustainable Means of Government Revenue: Taxation is a stable source of revenue for the government as long as there are economic activities carried in by individuals and corporate citizens in the society. The taxation system makes it possible for the Government of the day to be able to generate revenue to meet the needs of the present generation without preventing the future generations from meeting theirs.

Taxation ensures that the Government secures a stable flow of revenue which is employed in providing infrastructure, creating employment and growing investment, among other things, which ultimately improves the well-being of the citizens. Unlike other revenue generation sources such as levies, charges, and fees, the tax system assured stability and certainty.

2. Redistribution of Income: Taxation ensures the redistribution of income in the local economy in that tax revenue realized from high-income earners is used by the government to provide public infrastructure and needed utilities that serve the citizens, even the lowest income earners among them.

In other means of income Redistribution, taxes are sometimes used to establish social safety nets for indigent members of the society and other classes of people who may need such interventions.

Hence, taxation attempts to bridge the gap in living standards by redistributing wealth.

3. Stimulation of Investment in the Economy: One objective that the government tax system seeks to accomplish is the stimulation of domestic and foreign investment in the economy.

The local investments benefit from the competitive edge created by the tax system in that these businesses are retained in the economy. Local businesses aren’t burdened with taxes beyond their capacity.

The tax system has created a conducive environment for investment to thrive. This attracts foreign investments into the country. Tax breaks in select cases, as well as the Free Trade Zones, are some measures to attract investment into the economy.

4. Equity and Growth: Next to being a source of revenue, taxation has the potential to be a powerful tool for stimulating development in a country.

Corbacho et al. make a case for the reform of fiscal and tax systems to progressive systems that help promote economic growth, mobility, and social equality. “Taxation is more than revenue. It is a tool for development.”

All governments need revenue, but the challenge lies in carefully choosing not only the level of tax rates but also the tax base. Participants of the global conference of the Platform for Collaboration on Tax (PCT) voiced the concern that the trend toward lower taxation of capital (to encourage growth) is making it harder to counter the growing inequality of income and wealth.

These growing income and wealth gaps can undermine social cohesion and ultimately undermine economic growth as well. It should be a priority to ensure an appropriate distribution of the tax burden among taxpayers with a system that helps to preserve the income of poorer households.

5. Behavior: Factually, taxes have been used in many countries to encourage healthy behaviors and deter less healthy ones. Examples are tobacco taxation to lower tobacco consumption and green taxes to help the environment. In doing so, taxation can have a powerful impact on the outcome of human development.

Another example is the potential impact taxation has on the development of gender equality, a subject that is receiving increased attention in the policy debate on public finance and the responsibility of the government towards its citizens.

It has been proven that taxes influence people’s behavior and choices, with implications for health outcomes, gender equity, and the environment. The choices a government makes will make or break a society.
6. Social Contract: Effective tax administration can change the relationship between citizens and the government. Taxation not only pays for public goods and services; it is a major ingredient in the social contract between citizens and government. “How taxes are raised and spent can determine a government’s very legitimacy”.

When citizens see the tax system as being fair and find value in the public services they receive, they are more likely to comply with tax laws.

Trust in government is essential to create tax morale the extent to which people accept a moral obligation to pay taxes as their contribution to society. It is therefore important for governments to continue to build public trust by improving the design and the administration of their tax systems.

7. Promotes Fiscal Responsibility: The National Tax Policy which steers the taxation system in some state ensures that the revenue generated by the citizens and corporate businesses, as well as foreigners living in, are judiciously used by the Government to provide needed public infrastructure and services demanded. The tax system serves as a vital tool for national development and growth.

8. Contributes to Improvement of Public Tertiary Education: In Nigerian tax system, there is a 2% Education Tax imposed on all corporate entities in the country. This Education Tax is devoted to developing the public-owned tertiary institutions across state. The Tertiary Education Trust Fund (TETFUND) has the responsibility of investing the proceeds of the Education Tax towards developing the general conditions of public tertiary institutions in Nigeria. TETFUND funds developmental projects across public tertiary institutions ranging from the construction of classrooms, laboratories, hostels, and many other infrastructural projects.

In addition, TETFUND funds several programmes which are directed to training the academic staff of these institutions. Thousands of lecturers of varied levels have benefited from the sponsored Master’s degree and Doctorate programmes for over a decade.

Importance of Tax to Businesses

For business to flourish in the country there has to be good infrastructure such as roads, telephones, electricity, etc.

This infrastructure is developed by governments or through close involvement of the government. When governments collect money from taxes, it ploughs this money into development of this infrastructure and in turn promotes economic activity throughout the country.

The concept of taxation is also important to businesses because governments can fund this money back into the economy in the form of loans or other funding forms.

Taxes help raise the standard of living in a country.

The higher the standard of living, the stronger and higher the level of consumption most likely is. Businesses flourish when there is a market for their product and services. With a higher standard of living, businesses would be assured of a higher domestic consumption as well.

Taxes are essential and every citizen is meant to reap benefits of these taxes.

This is why it is important that citizens endeavor to pay taxes and understand that it is meant to be more than just a “money grab” from the government.

Conclusion on What is the Importance of Taxation?

Confidently, the impacts of taxation described in this article help to soften the blow the next time you pay your taxes. We all have to pay our fair share, allowing the government to generate enough resources to fund the priorities of society.

In turn, the government’s duty is to improve the lives and well-being of its citizens. This involves strengthening tax administration so that all citizens and businesses meet their tax obligations. And, establishing tax systems that are better structured and more effective in creating sustainable improvement for society as a whole.