The most prosperous modern states have a multitude of functions that go far beyond the core functions of national defense and the maintenance of law and order discussed above. However even these minimum function require resources. In a market economy that means the state needs a money income to hire people and buy supplies. The state has two potential sources of income:
a) selling goods and services in the manner of a business concern and
b) direct levies and requisitioning of money, goods and labour from the population it controls.
If the state has a minimal role control of the currency is only service it provides other than law and order. The income from the issue notes and coins this is known as ‘seniorage’. It is possible to simply print money or, in the case of specie, to debase the coinage by lowering purity of the metal. However if this is done on any scale it can only be a short term expedient, as continual increases in the supply of notes and coins will cause inflation and ultimately undermine trust in the currency.
Arbitrary requisitioning of goods and labour, like debasement of the currency, is another short term expedient that produces popular opposition. The press gang (squads that kidnapping men off the street) for service in the navy, a practice common up in wartime up until the end of the Napoleonic War was particularly resented. Taxes are considered preferable as the former are predicable and people can budget for them.
Adam Smith laid down following maxims for of taxation:the burden on individuals should be linked to their ability to pay; time due, manner of payment and quantity should be certain; the form of payment should be convenient for the tax payer in both time and manner and finaly the tax should be cheap to administer.
Taxes can be levied on income, wealth or consumption. Taxes on income and wealth are direct: they unavoidable (at least by legal means) These can be fixed – poll tax – or progressive - income tax. Taxes on consumption are indirect: they can be (legally) avoided by not spending money. These can be general: value added tax (VAT), excise tax, receipts tax, purchase tax or on specific items: salt tax, road tax (on road vehicles), window tax, excise duty on tobacco, beer wines and spirits.
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