THE RATIONALE OF TAXATION

Abstract

Why do Governments raise taxes? When should they impose taxation, in preference to other in struments of economic intervention? At first sight, the answers to these questions appear obvi ous. The purpose of taxation is to raise revenue. But this answer, although correct in a limited sense, is evidently inadequate. The traditional role of government was to provide public goods, such as defence and police, and to obtain funds for the purpose with minimum fuss or cost. But this is now a minor part of total fiscal activity in all western economies. Much of government ex penditure is now devoted to the provision to users, at prices well below cost, of services such as health and education which could be privately provided and which normally were privately pro vided before public expenditure achieved its present scale. Direct grants to individuals through social security expenditures form another major element of public budgeting. These three ser vices alone now account for over half of UK government spending. Thus most of the financial transactions of government now involve either taxing some activities to subsidise others, or tax ing some individuals to subsidise others. The traditional separation between revenue and ex penditure, which remains characteristic of British budgetary procedure, dates from an era in which the activities of public authorities were very different in both scope and scale.