In an effort to promote economic development and growth, governments require sustainable sources to fund their social programs. Programs that are providing education, health, infrastructure and several services are all important to reach the common goal, which is to have a functional, orderly and prosperous society. To do this, it demands constant government revenue.
The Purpose of Taxes
Taxation not just pays for public services and goods. But, this is a key factor in the social contract between the economy and citizens. This is why people and businesses like hotel in füssen, electronics store, restaurants and so on are taxed.
The way taxes are raised as well as spent determines the legitimacy of the government running the economy. Holding governments accountable is encouraging to have an effective administration of the tax revenues and more importantly, financial management.
All governments are in need of revenue. However, the real challenge here is to choose not just the level of the tax rates carefully but also, the tax base. Governments additionally have to design a tax compliance system that’s going to discourage the taxpayers from participating.
The recent study for 147 economies has shown that several companies are considering the tax rates as one of the top 5 constraints in their operations and the tax administration as one of the top 11.
Importance of Tax Rates
The tax rates imposed for businesses matters a lot for growth and investment. Where taxes are high, it makes the businesses opt out of the formal sector. In a research, it showed that a higher tax rate is associated with lower private investment and fewer formal businesses.
Truth is, 10% point increase in effective corporate income tax is already linked to the reduction in ratio of investment to the country’s GDP by up to 2% point and at the same time, lowering business entry by about 1% point.
Being able to keep the tax levels at reasonable rates help in encouraging with the development of the private sector and also, promotes the formalization of new businesses. Modest tax rates are especially important among small to medium-size enterprises that contribute a lot to employment and economic growth.