Why Governments Impose Taxes

I have personally asked people, on numerous occasions, if they knew why governments impose taxes on its citizens. The most common answer was because governments need to raise revenues to pay for government workers, programs, safety nets, public goods, and agencies. This is the most typical answer, and yes it’s true – but it’s only one out of three main reasons for why governments impose taxes on its citizens. There are three main reasons for which governments impose taxes on its citizens – three core reasons which can be seen in almost every country around the globe. These reasons are to gain revenues, regulate behavior, and to redistribute wealth. Of course everyone mentions the first, which is to gain revenues, but many people tend to over look the other two reasons I listed above. I think it’s time for us to discuss the three reasons separately, for one must understand why governments impose taxes on people in order to understand how taxes affect the economy.

The main reason governments impose taxes on their citizens is to collect Revenues. Without revenues, the government cannot sustain itself – it cannot pay for all of the public goods, safety nets, workers, and agencies it controls without any money. Governments also use this money to fund the national defense or military, while also paying for other public goods such as: infrastructure, public schools, law enforcement, fire fighters, and ex. This money is spent on anything from mandatory spending, to earmark spending. Sometimes the money collected from taxes doesn’t always go to public goods, which benefit the majority of the public, but rather to the special interests sought out by politicians and special interest groups. Where the money should be spent is a matter of opinion and is always debatable.

Regulating Behavior through taxation is another reason for why governments impose taxes on its citizens. Governments seek to regulate the very behavior of its citizens by taxing certain activities they want to encourage or discourage. We can see this everyday – the U.S. government has heavy taxes on cigarettes and alcohol, all of which are goods which are harmful to people and sometimes harmful to the public’s health and safety. We call these Sin Taxes, and what we consider worthy of a Sin Tax is also debatable since Sin Taxes can have a negative effect on the economy. Governments also seek to encourage several activities and they do this by lowering or completely abolish taxes on certain activities they want to encourage – these activities can range from buying a house, to going to college, to making more investments, and opening up businesses. Sometimes governments even issue tax credits to encourage certain activities or behavior. What governments should encourage isn’t up to debate – governments should encourage investment, savings, work, business, and risk taking, while fostering competitive markets and punishing monopolies. In short, governments should reward success and create the incentive to be economically productive.

Redistribution of Wealth through taxation is another reason for why governments impose taxes on its citizens. Governments may not even redistribute wealth on purpose – but it always happens through the payment of government workers, spending on safety nets, or the spending on fiscal stimuli. When a government worker receives a pay check, they’re receiving a pay check which was paid by the nation’s taxpayers – the government worker receives someone else’s hard earned money, not the government’s hard earned money (The government’s budget is not based off of money the government works for, it is based off of money it steals from the taxpayers.). The same thing happens with the passing of fiscal stimuli. A stimulus is normally spent on the lower to middle class consumer and business goods in order to artificially pump up demand to create jobs. But to pay for this spending, stimuli take money from the upper class and give it to the lower to middle class. The end result is that the group of people who receive the money spend more, and the people who have their money taken spend less. The net outcome is zero – if you take $50 dollars from Jack and give it to Jill, the end result is that Jill spends $50 dollars more and Jack spends $50 dollars less. You don’t create wealth, you only change who has the money. The same thing happens with safety nets, like welfare. Sometimes the redistribution of wealth happens on purpose, in which the government purposely takes money from Jack with the full intention of giving that money to the less fortunate Jill. But in the end, redistribution of wealth never generates wealth, it only changes who has the money.

Gaining revenues, regulating behavior, and redistributing wealth are the reasons for which governments impose taxes on its citizens. Now that you know this, you can now have a better understanding of tax theory.