Tax is a permanent instrument for collecting revenues. The primary purpose is to raise revenue to meet huge public expenditure. It is a major source of revenue in the developed world and has been appearing as an important source of revenue in the developing world as well. Most governmental activities must be financed by taxation. It has been an instrument of social and economic policy for the government.
The main objectives of the tax are as follows:
- Price Stability:
Taxes are regarded as an effective means of controlling inflation. By raising the rate of direct taxes, private spending can be controlled. Naturally, the pressure on the commodity market is reduced.
- Raise More Revenue
The government requires carrying out various development and welfare activities in the country. This objective means that the structure of taxes and tax rates ought to be devised to generate more revenue. For this, it needs a huge amount of funds. The government collects funds by imposing taxes. So, raising more and more revenues has been an important objective of tax.
- Prevent the Concentration of Wealth in a Few Hands
Tax is imposed on persons according to their income level. High earners are imposed on high taxes through a progressive tax system. This prevents wealth from being concentrated in a few hands of the rich. So, narrowing the gap between rich and poor is another objective of tax.
- Redistribute Wealth for Common Good
The tax collected by the government is expended for carrying out various welfare activities. In this way, the wealth of the rich is redistributed to the whole community.
- Boost Up the Economy
The economic development of any country is largely conditioned by the growth of capital formation. Tax serves as an instrument for promoting economic growth, stability, and efficiency. The government controls or expands the economic activities of the country by providing various concessions, rebates, and other facilities. Through proper tax planning, the ratio of savings to national income can be raised.
- Reduce Unemployment
The government can reduce the unemployment problem in the country by promoting various employment generating activities. Increased demand will stimulate investment leading to a rise in income and employment through the multiplier mechanism. Industries established in remote parts or industries providing more employees are given more facilities. As a result, the unemployment problem can be reduced to a great extent through liberal tax policy.
- Remove Regional Disparities
The regional disparity has been a chronic problem for developing countries. Tax is one of the ways through which regional disparities can be minimized. The government provides tax exemptions or concessions for industries established or activities carried out in backward areas. This will help increase economic activities in those areas and ultimately regional disparity reduces to a minimum.