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- 5 Marks
Question
Taxation is a mechanism through which the government seeks to realize some of its economic objectives. It is one of the oldest means by which the government expenditure is funded. Taxation plays a central and significant role in developing countries over the world.
Required:
Explain FIVE (5) economic roles of taxation. (5 marks)
Answer
Five economic roles of taxation:
- Raising revenue for public expenditure: Taxes fund public services like infrastructure, health, and education.
- Redistribution of income: Progressive taxation redistributes wealth from the rich to the poor.
- Controlling inflation: Increasing taxes reduces disposable income, controlling inflation.
- Encouraging investment: Tax incentives can encourage investment in specific sectors of the economy.
- Managing the location of industries: Tax rebates and incentives can help relocate industries to underdeveloped areas.
- Stimulation of economic growth
In times of depression in an economy, taxation can be used as an instrument to
stimulate growth. This can be done by reducing taxes to enable companies plough
back or reinvest profits that would otherwise go into tax payments. At the same
time, reduction in consumption taxes and individual taxes would help boost
consumption thereby increasing economic growth.
- Tags: Economic Roles, Fiscal Policy, Government Expenditure, Revenue, Taxation
- Level: Level 2
- Topic: Overview of the Ghanaian Tax System and Fiscal Policy
- Series: DEC 2023
- Uploader: Joseph