Tax is a compulsory fee levied by a government on its citizens and corporations to generate funds for a variety of purposes. Taxes are used for a wide range of public services such as education, health care, social welfare programs, unemployment benefits and infrastructure. Governments can also use them to fund wars and other national defense purposes. When expenditures exceed revenue, the result is a government debt, which may be serviced using taxes.
Taxes are often categorized into types such as sales, property and excise taxes. They can be levied as a percentage of a monetary exchange (such as sales and property taxes), as a set amount on physical quantities (such as excise taxes on gasoline) or as a lump sum (such as income and wealth taxes). In addition, they can be imposed based on the location of an activity or asset (property taxes) or by the source of the money (income and consumption taxes).
The purpose of taxation is typically defined in economic theory as resource allocation, income redistribution and stabilization. In addition, some economists have included objectives such as economic growth or development and international competitiveness. However, the trade-offs between these different objectives are challenging to balance.
The main difference between taxes and fees is that taxes are primarily designed to raise revenue, while fees have other purposes such as to offset the cost of providing a service. For example, a fee to enter a park helps cover the cost of staff and maintenance. Also, some taxes are imposed to penalize certain activities such as littering.
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