Taxation is the charges that governments place on individuals or corporations to finance their expenditure. Taxation plays a significant role in how public finance is conducted today. The main goal of taxation is to increase revenue and it is used as a way to redistribute wealth within an economy to reduce the divergence between the rich and poor. One of the main purposes of taxation is for the government to provide funds in order to increase public welfare and provide society members with more economic freedom. Another purpose of taxation is to control the economy in order to prevent inflation or depression, reduce inequalities in wealth, and protect local industries.
There are different types of taxes that are separated into direct tax and indirect tax. Direct taxation are based on the income of the wage earner while indirect taxation can be avoided because as an example, it can be sales tax placed on goods or services. The types of taxes include sales tax, which is tax on the sale of goods and services; duties, the taxes on importation; excise tax, tax on production of goods; and personal income tax.
The marginal rate of tax (MRT) is the percentage of tax taken from an extra dollar earned/spent. Proportional taxation is when marginal rate of tax equals the average rate of tax. The proportion of tax paid increases with a higher income but will stay the same as long as income does. Progressive taxation is when marginal rate of tax is greater than the average rate of tax. This means that a larger portion of tax will be taken out of the income of higher income earners while lower income earners have a smaller proportion of tax taken out. Converesely we have regressive taxation which not often practiced because it increases the separation between higher income earners and low income earners.