Definition:

Taxation is one of the components of public finance. It deals with government receipts from the imposition of taxes on the citizens and business organizations.

A tax is a compulsory levy by the government on income and properties of

citizens\ profits of businesses and on goods and services for which no direct compensation is made. In other words, a tax payer does not receive a direct benefit from the government in return for the tax paid. Rather, the benefits from tax money are made available to everybody in the society.

 The primary function of taxation is to raise revenue to finance government expenditure to meet up with the rapid increase in government spending. In

Cameroon over the last decade, higher rates of taxes has been imposed and new ones introduced.

Taxes constitute about 60% of government income. The concept of tax involves two fundamental elements, namely: tax base and tax rate.

• The tax base is the item or object being taxed and it usually includes incomes, wealth of individuals, profits of business organizations, and capital gains.
• Tax rate is the proportion, fraction or percentage of the tax base paid in tax. It may be a percentage or flat rate.

 Reasons for Taxation

There are several reasons why the governments of a country levy taxes.

1. To raise revenue: This is the oldest and most important reason why the government of a country imposes taxes on income and properties of the citizens.
2. To foster the redistribution of incomes: Taxes are used as an instrument to redistribute income in the society. In most cases, a progressive tax is used to redistribute income in favour of the poor.
3. To discourage and reduce the consumption of certain goods: There are certain goods whose consumptions are considered to be harmful to the society. For example, the consumption of cigarettes and some kinds of drugs are harmful both to the consumer and society as a whole. Consequently, they are taxed heavily in order to discourage their consumption.
4. To encourage investment and employment opportunities: A reduction in taxes is an incentive to encourage private individuals to invest. When taxes are reduced and subsidies increased, firms are encouraged to expand and increase investment; new businesses are created leading to increase job opportunities and the level of employment in the economy.
5. To protect infant industries: Infant industries are newly created industries set up by both the private individuals and the State struggling to gain stability. The government protects them from being competed out by giant multinationals or well established foreign firms by taxing the Multinational companies heavily.
6. To correct balance of payments disequilibrium (BOP): import duties are used to correct balance of payments disequilibrium. Given an adverse BOP, the government will raise import duties in order to discourage and reduce imports into the country and vice versa.
7. To control the rate of inflation: When the rate of inflation is too high, the government imposes additional tales in order to reduce the purchasing power of consumers.
8. To correct the problem of externalities: Externalities are social costs or benefits borne or enjoyed by the society as a whole which are generated by the economic activities producers and/or consumers. Social costs or negative externalities take the form of pollution, noise, traffic congestion, indiscriminate waste disposal etc. In order to reduce social costs on the society, the government imposes high taxes on the firms generating them and may use the additional income to clean up the mess.