5 Reasons Why Governments Collect Taxes

Shyam Sewag
7 min readMay 14, 2021


5 Reasons Why Governments Collect Taxes

Taxation has been an important factor in human civilization for a very long period of time. Some of us know why governments impose taxes and collect them periodically. But the majority of us wonder why is it required to pay these taxes. I am anyway paying for the goods and services for their value but why are these taxes need to be paid? These taxes only make things more expensive. Not only that but if I am earning money for the hard work then why do I have to pay a portion of it to the government? And many more questions like that. I have consolidated 5 reasons why governments collect taxes.

Before getting to the reasons why governments collect taxes, we need to also look at the history of taxes. Along with that, knowing about the types of taxes that a government can levy is also important. Therefore, in this post, I will try to cover these three points and explain them in a simple way.

Here Are The Details About Why Governments Collect Taxes:

History Of Taxation

Tracing down the exact origin of taxation is quite a difficult task. Because we will need to rely on the documented history. It is considered that the first record of organized taxation comes from Egypt around 3000 B.C. It was mentioned in numerous historical sources including the Bible (Chapter 47, verse 33 of the Book of Genesis).

Nearly 2000 years ago, there was a decree from Ceaser Augustus (the first Roman Emperor) that all the world should be taxed. In Greece, Germany, and Roman Empires, taxes were also levied sometimes on the basis of turnover and sometimes on occupations. For many centuries, revenue from taxes went to the Monarch.

In the Indian scenario, Manu has been credited with the initial taxation policies through Manu Smriti. Manu stated that the king could levy taxes according to the Sastras. After Manu, the next personality was had the most influence on the current taxation system was Kautilya (Chanakya) through his Arthasastra.

From the Roman age and through medieval European history, new taxes on inheritance, property, and consumer goods were levied and often played a role in the war, either by funding them or provoking them.

In today’s world, the majority of the countries have their well-thought-out taxation system. Taxes are levied on the products, services, imports, exports, income, etc. But at present, our civilization is progressing at a higher rate, unlike the previous civilizations. It can also be estimated that we might see a completely different form of taxation in upcoming years. On the contrary, the concept of taxation can be completely taken out.

Types Of Taxes

Taxes are levied on various things. But in general, we can see these taxes divided into two broader categories i.e. Direct Taxes and Indirect Taxes. Both of these types have various subtypes and all of them serve their purpose appropriately.

Direct Taxes: These are the taxes levied directly on the income of individuals. Depending on how much a person has earned through different sources of income, the tax liability is imposed at a different rate. This is also known as the progressive taxation approach. Some of the countries can impose a blanket tax rate on the income for all individuals. India currently follows a progressive taxation system. I will try to cover the complete taxation scenario in India in a different blog post. Apart from this, even if you are a non-resident, you may be required to pay the tax on the income generated in the country.

Indirect Taxes: These taxes are levied on goods, services, land, and other things. The government can decide various tax rates on different things. Moreover, the tax rates can differ from state to state depending on the country that you are residing in. It is difficult to evade paying indirect taxes because generally they are included in the total price of the goods or services. Indirect taxes also include Value Added Tax (VAT), Goods and Services Tax (GST), Excise duty, Import and Export Duty, etc.

Reasons For Collecting Taxes

After briefly understanding the history of taxation and broader types of taxes, we can look at the reasons why governments collect taxes from us. After careful consideration, I came up with the following reasons why governments collect taxes:

Income Source For The Government

In order to understand the first and most important reason, one needs to understand how the governments earn revenue. Because, being government, they do not provide any direct goods or services to the general public through which they can earn money. Because after all, governments are meant for serving the public. But on the other hand, it also needs funds to meet the demand.

In the ancient ages when a king or monarch used to rule the nations it was easier to understand that people had to pay taxes because a king would have mandated it. Secondly, the tax which was collected used to be kept in treasury through which kings and emperors could fund the security and other important aspects to keep the kingdom safe.

In today’s world where most countries have democracy, governments are supposed to keep the nation safe. In order to do so, they need a sufficient influx of cash and revenue. The amount collected from the taxes that we pay becomes the revenue for the governments. All this tax money gets deposited in the treasury which is typically monitored by the Ministry of Finance in each country. Therefore, the first reason for collecting taxes is generating revenue for the governments.

Source For Public Expenditure

So, the primary reason for collecting tax is revenue for the government. But, what does the government do with all this money which is collected? Do you ever wonder why the government has to build bridges, roads, provide transportation facilities, etc.? Where does the money come from for all these things?

The answer is the second reason for collecting taxes. The amount which is collected by the government gets reutilized on all these public expenditures. Yes, all the roads, bridges, infrastructure made for the public are categorized under public expenditure. This is important for the growth of the economy. If the government does not focus on public expenditure then it is unlikely that employment opportunities will be created. Moreover, if better infrastructure is not provided then it will halt the progress of a country or at least slow down the pace.

The taxes that you and I pay turn out to be the source of public expenditure and hence it is advised that one should pay the taxes on time.

Paying Off Debts

Running and managing a country’s affair is not a child’s play. When it is a country like India which has one of the highest populations in the world, managing things becomes even tougher. Therefore, the governments have to take loans/advances from other countries.

These loans are generally granted by the International Monetary Fund (IMF). Just like any other type of loan, these loans also need to be repaid within a stipulated time with interest. The loan amounts are huge and as a result, we often see the countries reporting deficits in their yearly budgets.

The amount that we pay through taxes is used to pay off these debts. If the debts are not paid off then even countries can go bankrupt and that is not a pleasant sight. Therefore, economists, policymakers, and government officials try to reduce the burden of debt as much as possible. The tax collected from various sources can help significantly to achieve that target and hence the governments collect taxes.

Maintain Fair Trade Practices

Imagine a product that costs INR 1000 if produced within the country and after including all the other costs, the end-user/consumer has to pay 1500 for it. Whereas the same product imported from a foreign country (excluding taxes) costs just INR 600. Of course, the consumer will opt for the second option and buy the product by paying INR 600 instead of paying INR 1500 for the same product. This will likely discourage the consumption of domestically produced products. That is where taxation comes into the picture.

Governments usually levy higher taxes on imports to encourage buying domestic products. This helps in maintaining fair trade practices without giving any competitor an upper hand to capture the market. On the other hand, the governments try to levy minimum taxes on the export as they bring revenue in foreign currency in the country. Therefore, encouraging exports and discouraging imports is something that can be used to keep the competition fair.

Hence, we can understand the government’s rationale behind imposing and collecting taxes.

Regulating Inflation

The last reason out of the 5 reasons why governments collect taxes is regulating inflation. It is a phenomenon through which the general prices of goods and services rise. The rate of inflation is something that is tricky. If it is too high then things will become so expensive that people will not be able to afford them.

But how can inflation be regulated through taxes? If the government estimates that the rate of inflation is too high then they can reduce the taxes on products to make sure that people can afford them. If the government estimates that the inflation rate is too low and it is not helping the economy then they can increase the taxes to increase the prices of products. Because the production cost of a product will not change overnight. All the fluctuations that we observe from state to state are because of the tax implications.

Hence, the simple reason for imposing taxes is that if required the government can adjust the tax rates to ensure that the economy is growing at a steady rate. These provisions are made to avoid sudden unfavorable situations. In hindsight, if we look at taxes from a holistic point of view, we can understand why governments impose them and put so much effort to collect them so that the economy can prosper.



Shyam Sewag

Budding blogger. Interested in finance and global economic affairs.