Merits and Demerits of Tax System

Although taxation has been the major source of revenue for most government and worldwide as whole, taxation has both advantage and disadvantage to nation and individual person. The advantage of taxation include the following:-
1. Control inflation
Through increasing of various taxation rate, taxation can be used as the means of controlling inflation especially the demand pull inflation. Since raising of taxation rate of various commodity result into decrease in purchasing power of individual person hence being a solution to demand pull inflation.
2. Discourage use of harmful products
As there are many harmful products which are produced in various country but the manufacture of such products may at the same time being a good tax payer. The government may not decide to shutdown such companies instead the government will impose high tax upon such commodity to discourage users from consumption of such commodity, example cigarette and spirits.
3. Revenue generation
Taxation also act as important root stock for revenue generation. Since even if the government will have other source of income apart from taxation still the amount of revenue obtained from collection of different types of tax is higher compared to the amount obtained from other sources.
4. Redistribution of income
Through taxation system especially the progression tax system taxation can be a means of ensuring fair distribution of income between individuals by imposing high tax rate for those who earn more and less tax rate for individual who has lower income. This also can lead to reduction of income gap between poor and rich people.
The disadvantage of taxation refers to all chaos brought along by taxation issues within society either directly or indirectly. The disadvantage of taxation include the following:-
1. Reduce purchasing power
Taxation especially when the tax rate are high has the tendency of reducing the disposable income of an individual which subsequently reduce the purchasing power.
2. Discourage saving
Since taxation rate reduce the disposable income of an individual, this means an individual saving ability will be reduced ii not completely stopped from such habit hence preventing individual from doing other economic activities.
3. Discourage investment
Heavy tax rate on firm profit become disincentive for investor to invest on particular sector instead investors will opt to invest in other sector which their tax rate is of reasonable value.

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