A tax is a compulsory levy imposed by a government on individuals or entities for the purpose of raising revenue to fund a government’s spending. Taxation can also serve the more general purposes of achieving redistribution and economic stability. In the modern world, taxes raise money to pay for infrastructure, education, health systems, social safety nets, national defense, and law enforcement. Governments can also use taxes to increase efficiency, for example imposing a carbon tax on the consumption of fossil fuels to help reduce climate change.
Taxation has a variety of purposes, but economists usually break it down into three broad categories: resource allocation, income redistribution, and regulation. The first objective is based on the idea that a free market allocates resources poorly, and that government intervention can improve the distribution of wealth. The second objective is to alter prices or costs in order to regulate an economic process. This is often accomplished through the use of taxes, which can be applied at a variety of different times and at different levels of production.
The third objective is to influence behavior or encourage certain types of activities. A tax can do this by influencing demand, or it can be used to discourage unwanted behaviors such as illegal activities and substance abuse. Examples include a cigarette tax and an excise tax on alcohol. A tax can also serve to provide for a welfare system, as when it is imposed on the purchase of gasoline, and by providing retirement benefits in the form of FICA (Federal Insurance Contributions Act). Taxes vary widely across jurisdictions, with rates increasing as taxable income increases.