In 1716, Christopher Bullock wrote, “Tis impossible to be sure of anything but Death and Taxes.” You’ll pay taxes throughout your life and, for some, even after you die. But, they do serve a purpose and present some advantages and disadvantages.
It helps to understand there are direct and indirect taxes. Direct taxes are levied on income and profits. Indirect taxes are paid by consumers on goods and services and, then, paid to the government.
Taxes are often classified as:
- Consumption taxes are determined by how many things people use rather than by their income.
- Sales Taxes are imposed by local or regional authorities on purchases of goods and services.
- Cascade Taxes hit each stage of production and process leading to point of sale.
Vat Taxes are Value-Added levies determined by the value of the product at each stage of its supply chain.
Regardless of their type or origin, taxes have advantages as well as the disadvantages about which everyone complains.
So, what are the advantages of taxation?
- Reduces inflation. Inflation puts the nation’s economy at risk. It distorts the value of a currency and devalues the cash you have in reserve. Taxation reduces your purchasing power and slows demand.
- Manages sales of vice products. Taxation on cigarettes, alcohol, and other toxic products discourages the purchase of goods that harm society.
- Taxes produce revenue. Taxation produces a major revenue stream for local, state, and federal governments. As Eiliff.com puts it, “The money that is raised from various taxes is spent by the government for the construction of schools, roads, hospitals and also for other development causes.”
- Paying taxes shifts income. A tax that charges the wealthy more than the poor has a way of redistributing income across the different social classes. Those with higher incomes pay more than those with low incomes. According to AOSS (Australian Council of Social Service), “Tax and related expenditure reform should improve the living standards of people on the lowest incomes and result in a more equitable distribution of public supports between low, middle and high-income earners.”
And, are there disadvantages?
- Lowers purchasing power. When you pay taxes on a product, you have that much less money. For example, if you buy a car, you may be charged thousands in taxes. When that money comes out of your pocket, you have that much less to spend.
- Reduces your savings. Because that taxation cam out of your wallet, you have that much less to save. Paying taxes takes away from the money you would add to your retirement or savings plan.
- Investments suffer. As you spend money on taxes, you have less money to invest in the market, business capital, and retirement strategies. If this becomes a problem for the business or individual involved, they may want to seek the advice of a tax accountant (Sydney).
Pros or Cons?
Taxes are levied by governments you vote into office. If they are proving a real problem for you, you can demand accountability and transparency of the officials. If they are being misused or misdirected, you have some power in your vote.
Nonetheless, you must pay the taxes they levy accurately and on time. Penalties can be significant and damaging.
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