What Is Taxation?

Chris Haynes

Reviewed by

Chris Haynes WSO Editorial Board

Expertise: Asset Management | Investment Banking

Taxation is the process of a government claiming money from the general population for the purpose of using that money to run the country. Ideally, a government will only spend the amount it gains in taxation, although in the Western world it usually spends far more and runs a budget deficit.

Purpose of Taxation

Generally, taxes provide the funds for public goods and services that cannot be adequately produced by the competitive market. Examples include schools, roads, and national defense. Additionally, taxes can be added to transactions such as sales. Governments can also tax events, such as death via an estate tax also known as an inheritance tax. Taxes can also be used to push consumers away from goods or services that are deemed harmful. This type of tax is known as a "sin tax". This is usually a state tax on tobacco, alcohol, or gambling. In some societies, taxes have also been used to redistribute wealth to create a more equitable society. All in all, The effective use of tax dollars is the center of a long-standing economic debate.

Here is a brief video that explains taxation.

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Chris Haynes

Chris Haynes is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund. Previously, Chris served as an investment analyst with New Holland Capital and as an investment banking analyst in SunTrust Robinson Humphrey's Financial Sponsor Group. Chris graduated Magna Cum Laude from the University of Florida and earned a Master of Finance (MSF) from Washington University in St. Louis. This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.