Taxation

Taxes, Duties, and the Tax Structure

Taxes and duties are defined as payments where no rights are accrued due to the payment. A tax or duty can be levied throughout the economic system; for example, all transactions with goods and services might be eligible for the imposition of a tax or duty. Taxes can be imposed on direct transactions and on the ownership of certain types of goods, such as cars and houses.

The tax structure differs among countries and often is dependent on historical traditions and local economic systems. Open economies with many transactions have one type of tax system and more closed economies have other types. Furthermore, the tax structure and size of taxes and duties depend on the size of public sector expenditures. In more mature welfare states, the tax level is correspondingly higher.

In countries with a developed ability to ensure tax compliance, for example, by intensive use of information technology systems and control of the flow of money, income tax might be used to a higher degree than in other countries, where, for example, taxation of car use (by, e.g., requiring a visible sign in the car that payment has been made) or other clearly identifiable goods can be a more efficient tax instrument. Duties on imported goods can be an instrument to finance public sector expenditures, but this is less likely today due to increased international free trade and free trade agreements. Duties on imported goods can also reduce pressure on the balance of payments, thus indicating that taxes and duties have several functions in the economy.

Taxation is having an impact on the economic functioning of the various markets—labor, capital, and markets for goods and services. The way to discuss and measure this is by comparing the situation with a purely theoretical one without any taxes or duties. This is, therefore, a theoretical comparison, as all countries need income to finance public-sector spending—the aim of the exercise being to try to develop a tax system with as few market distortions as possible.

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