Why are taxes important?

Modern governments require resources to provide essential goods and services (such as health and education), to build infrastructure (such as highways or a national internet network), to make transfer payments (such as aged pension, unemployment benefits or cash subsidies to businesses) and to make interest payments on government’s debts. Governments can potentially derive their revenues from many different sources such as tax collection, operating surpluses of government-owned enterprises, revenue from natural resources, investment returns from sovereign wealth funds or overseas development assistance. Taxation, as a process of transferring resources from the private sector to the public sector, represents by far the most important source of government’s revenue in most countries around the world. For example, for the 2015-16 fiscal year, tax revenue constituted almost 79 per cent of total revenue of the general government sector in Australia. Even the Persian Gulf countries, which have traditionally relied mainly on revenues from their oil and gas, have commenced to establish a formal tax system to stabilise their government revenues.

How important are taxes for public sector development? Can taxes harm economic growth?

Except for a small number of natural-resource-rich countries, taxes are fundamentally important for public sector development. Tax revenues provide the necessary funds to promote economic growth through infrastructure and human capacity development. Tax revenues also provide the necessary funds to finance transfer payments and other programs to alleviate poverty. Progressive tax systems also redistribute income away from the rich to the poor, producing a more equitable after-tax distribution. Sadly, in many developing countries, tax systems are not sufficiently progressive, so they are not adequately redistributive. Further, a non-trivial proportion of public spending on infrastructure and human capital development is wasted through poor management and corruption.