Taxation

Taxation can be used to finance government expenditure or to service the national debt. It can also be used to promote welfare or to change the distribution of income or wealth, and it can have the unintended effect of reducing welfare. Its use as an instrument of fiscal policy is considered in a separate article on that subject.

The effects of taxation

Every combination of the various forms of taxation has a different effect upon welfare, but all of them have certain common features. In the terminology of economic theory, each of them has an income effect and most of them tend to have substitution effects. A tax on biscuits reduces the income of biscuit buyers, but it would also induce some of them to switch their purchases to a cheaper alternative such as bread.