Why governments levy taxes

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Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Income Tax Terms Guide: Taxes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Filing Status. Types of Income. Tax Types and Terms. Introduction to Taxes. What Taxes Do On a general level, tax collections provide a revenue source to support the outlays or primary activities of a government.

Learning Objectives Explain the role of taxation with respect to consumer and firm behavior. Key Takeaways Key Points Taxes allow the government to perform and provide services that would not evolve naturally through a free market mechanism, for example, public parks. Governments also use taxes to establish income equity and modify consumption decisions. Key Terms sales tax : A local or state tax imposed as a percentage of the selling price of goods or services payable by the customer.

How Taxes Impact Efficiency: Deadweight Losses In economics, deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. Learning Objectives Discuss how taxes create deadweight loss. Key Takeaways Key Points Causes of deadweight loss can include actions that prevent the market from achieving an equilibrium clearing condition and include taxes.

Key Terms Pareto optimal : Describing a situation in which the profit of one party cannot be increased without reducing the profit of another. Licenses and Attributions. CC licensed content, Shared previously. Use the tax system to provide incentives for better social outcomes, for example through tobacco and carbon taxation and smart earmarking of taxes to support social programs in education and health.

Institute minimum thresholds for paying taxes and progressive personal income tax regimes which contribute to reducing income inequality. Philippines : With World Bank support, the government raised tobacco and alcohol taxes over the period The additional resources were used to triple the number of families receiving free health insurance, from 5.

The ongoing engagement has already produced tangible results. Return to main topic. Achieving the Sustainable Development Goals requires massive investment in physical and human capital. Focus is needed on the quality, fairness, and equity of domestic tax collection.

Increasing tax revenue in developing countries What role can civil society play in tax administration? How tax systems impose psychological burdens on taxpayers. See all blogs on taxation. Related Trust Funds. Platform for Collaboration on Tax logo. Delays and inefficiencies in the VAT refund systems are often the result of fears that the system might be abused and prone to fraud.

That is also one of the reasons why, in some economies, it is not uncommon for a claim for a VAT refund to automatically trigger a costly audit, undermining the overall effectiveness of the system. The Doing Business case study company, TaxpayerCo. It performs a general industrial and commercial activity and it is in its second year of operation.

The case study scenario has been expanded to include a capital purchase of a machine in the month of June. The results show that, in practice, only of the economies covered by Doing Business allow for VAT cash refund in this scenario. This number excludes the 25 economies that do not levy VAT and five economies where the purchase of a machine is exempted from VAT. In other economies businesses are only allowed to claim a cash refund after carrying forward the excess credit for a specified period of time four example, four months.

The net VAT balance is refunded to the business only after this period ends. This is the case in 27 economies of the measured by Doing Business. The legislation in other economies — typically those with a weaker administrative or financial capacity to handle cash refunds — may not permit refunds outright.

Instead, tax authorities require businesses to carry forward a claim and offset an excess amount against future output VAT. Insofar as procedural checks are concerned, in 76 of the economies which allow for a VAT cash refund in the Doing Business case scenario, a claim for a VAT refund will probably lead to an additional review being conducted before approving the VAT cash refund.

Effective audit programs and VAT refund payment systems are inextricably linked. In Canada, Denmark, Italy and Norway a request for a VAT refund is likely to trigger a correspondence audit, which requires less interaction with the auditor and less paperwork.

By contrast, in most economies As far as the format of the VAT refund request is concerned, in 54 of the economies the VAT refund due is calculated and requested within the standard VAT return submitted in each accounting period. In the other economies, the request procedure varies from filing a separate application, letter or form for a VAT refund to completing a specific section in the VAT return as well as preparing some additional documentation to substantiate the claim.

In these economies, businesses spend on average 5. Economies in Europe and Central Asia also perform well with an average refund processing time of These economies provide refunds in a manner that does not expose businesses to unnecessary administrative costs and detrimental cash flow impacts. Doing Business data also show a positive correlation between the time to comply with a VAT refund process and the time to comply with filing the standard VAT return and payment of VAT liabilities.

This relationship indicates that tax systems that are harder to comply with when filing taxes are more likely to be challenging throughout the process. Tax audits play an important role in ensuring tax compliance. Nonetheless, a tax audit is one of the most sensitive interactions between a taxpayer and a tax authority.

It imposes a burden on a taxpayer to a greater or lesser extent depending on the number and type of interactions field visit by the auditor or office visit by the taxpayer and the level of documentation requested by the auditor.

It is therefore essential that the right legal framework is in place to ensure integrity in the way tax authorities carry out audits. A risk-based approach takes into consideration different aspects of a business such as historical compliance, industry and firm-specific characteristics, debt-credit ratios for VAT-registered businesses and the size of a business in order to better assess which businesses are most prone to tax evasion.

One study showed that data-mining techniques for auditing, regardless of the technique, captured more noncompliant taxpayers than random audits. In a risk-based approach the exact criteria used to capture noncompliant firms, however, should be concealed to prevent taxpayers from purposefully planning how to avoid detection and to allow for a degree of uncertainty to drive voluntary compliance.

Despite being a postfiling procedure, audit strategies can have a fundamental impact on the way businesses file and pay taxes.