Taxes

The Necessary Evil of Taxes

Taxes are a bit of a a mystery to many people. They hate them and know very little about them. Taxes aren't all that bad they should really be considered a necessary evil, but if used well not even really evil.

Taxes to a country is like salaries to you. The huge difference is in the way the government spends. The theory behind taxes is that you do pay some, but in the end it finds its way back to you in the form of roads, state pensions, home-defense, increased safety, etc. The two problems are that in many cases this may not happen in a swift, directly visible way (redistributive function) and the other is that people take roads, safety, etc for granted.

The Functions of Taxes

The main reasons behind taxation are, state income, redistribution  and the influencing of the economy.

State Income

State income is needed for pretty obvious reasons. Consider what a government has to do. Build a new power-plant, pay public employees a descent wage, fund domestic and international aid, clean the streets, build roads, help in designing extra services for the disabled, and the list could go on for thousands of pages. The government also uses your tax money to fund itself so that the state can run efficiently (hopeful) and tend to your needs.

Redistribution

Redistribution is needed, very roughly put, to take away from the rich and give to the poor, Robin Hood style. Higher income is usually taxed more heavily than lower income and tax money is spent more on things that the poorer incomed people use. They rarely subsidies car manufacturers so rich folk can get a Bentley for a 5% discount for example. They do give school books for free or much cheaper to the poor for example. This is not free for the government, publishers will not give their books away for charity reasons.

Economical Influence

Influencing the economy is also a part of the deal. Customs duty is a great example for this. If the government doesn't want the Chinese economy to flood domestic shops with their overly cheap products they will impose a hefty duty. If cheap products are available, who will buy domestic products? They may also use taxes to reduce or induce transit and commerce in general.

Amount Determination

Progressive

Progressive taxes are the most common type. My example of the Bentley above fits it perfectly. The theory behind it is that rich people will be able to pay more tax compared to their income. So there may be three tax levels, 15%, 20% and 30%. The first level will be paid by people who earn less than $1200 a month, the second is paid by people who earn between $1200 and $3000 and above that you pay the highest amount. Economically this is not fair although it may be reasonable to base it on the fact that this effectively "hurts" higher income earners less because the higher you're income the less your marginal willingness to spend.

Regressive

Regressive taxes take away more from the poorer part of the country while being easier on the top earners. Despite this regressive taxes aren't the opposite of progressive taxes in most cases. Instead of lower incomes paying a higher portion everyone pays a fixed amount. VAT is a good example as it is a fixed percent for everyone and if you have a small income this 25% for you will mean say 10% of your income spent on VAT, while for someone earning ten times as much it will only be 1%.

Proportional

Proportional taxes are a fixed tax ratio for everyone. Low incomes will pay 10% of their $1200 salary, as will people who earn six figures a month. Theoretically this is the most fair version as everyone is proportionally burdened the same.