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Role of Taxation in promoting equity

What is a tax?

Tax is a fee charged ("levied") by a government on a product, income, or activity.taxes

Why taxes are imposed?

There are different reasons for imposing taxes.

  • To finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning.
  •  To reduce consumption of goods that creates negative externalities.
  • To control the amount of imported goods i.e. tariffs
  • Used as a part of fiscal policy to control aggregate demand in the economy.
  • To control income inequality.

Types of taxes

Direct Taxes

It is a tax paid directly to the government by the persons on whom it is imposed.


  • Tax imposed on peoples’ income-Income tax
  • Tax on wealth – wealth Tax
  • Tax on firm’s profits.- corporate tax

Further reading  CLICK HERE

Indirect Taxes

Indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return.

Indirect taxes are generally included in the price of goods and services, so are less obvious to those paying the taxes than direct levies.  Thus indirect taxes are also known as expenditure tax or consumption based tax.

value added tax


  • GST (Goods and service tax)
  • VAT (Value added tax)
  • Consumers are charged a percentage of tax while purchasing a good/service and then the seller pays the tax collected to the Government.

Download this document for further reading on Indirect tax http://download.nos.org/srsec311new/L.No.40-A.pdf


Other measures to promote equity

The governments also undertake expenditures to promote income equity. These include


Provide directly, or to subsidize, a variety of socially desirable goods and services. These include health care services, education, and infrastructure that include sanitation and clean water supplies.  

Transfer payments

Government provide various kind of assistance to low income groups in the society. The objective is to support them in maintaining a reasonable standard of living and to lower inequality. These payments are given directly to these groups in the form of monetary help. Examples include Social Security, unemployment compensation, welfare, and disability payments.



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