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June 19, 2012 - PRLog -- Government derives receipts through various sources to finance expenditure, whether transfers or purchases, and to pay off public debts. They are classified as taxes, on-taxes, grants-in-aid and public debts. Generally non-taxes are the prices paid voluntarily, whereas taxes are paid compulsorily, putting aside the charge that they are never morally justifiable. The economic rationale of levying taxes is:

1. To bring about optimum and efficient resource allocation within the economic System.
2. To help accelerate the rate of savings and investment, this is an extension of Resource allocation.
3. To reduce inequalities in income, wealth or consumption.
4. To check price rise and inflationary tendencies.
To promote employment opportunities, this is a case of stabilization.

General taxes are divided into two categories: taxes on factors (direct) and taxes on commodities (indirect) falling on outputs. It may also be noted that frequently used distinction between “direct” and “indirect” taxes is ambiguous. The tax system develops in response to several economic, political and social influences. Musgrave and Musgrave (1989) have listed following criteria to appraise the quality of a tax structure:


1.   Everyone should be  made to pay his or her “fair share”
2.   Taxes should be chosen so as to minimize interference with economic decisions in otherwise efficient markets. Such interference imposes “excess burdens” which should be minimized.
    Where tax policy is used to achieve other objectives, such as grant investment incentives, this should be done so as to minimize interference with the equity of the system.
   3. The tax system should permit fair and non arbitrary administration and it should be understandable to the tax payer.

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According to conventional wisdom, there is a definite preference for a uniform rate structure, but why in the indirect taxes, commodities are taxed at different rates? This issue may be resolved on the basis of efficiency and equity grounds. Non- Desirability of uniform rates can be demonstrated by applying partial equilibrium analysis. The situation of perfectly elastic supply as a price gets distorted when the tax is imposed. This distortion is called as excess burden or deadweight loss or Efficiency loss. It increases disproportionately with the rate of tax and price elasticity of demand.

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