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.
To learn more about this concept and become a master at Financial Statement modeling, you should check out our FSM Modeling Course. Learn more here.
Module 1: Getting Started
Module 2: Fundamental Concepts
Module 3: The Income Statement
Module 4: Working Capital
Module 5: PP&E and Intangibles
Module 6: The Cash Flow Statement
Module 7: Debt & Interest Schedule
Module 8: Finishing Your Model
Module 9: Bonus