(a) Taxation is the act of imposing a compulsory levy by the government or its agency on individuals and firms or on goods and services.
(b) Ways by which taxation can be used to improve the economy
(i) It is used to raise revenue for the government. Through this, money required for the provision of essential services and for the financing of capital projects are made available.
(ii) It is used to redistribute income, thereby reducing income inequality in the country. This can be achieved through progressive taxation e.g. P.A.Y.E
(iii) It can be used to discourage the production and consumption of harmful goods. Indirect taxes imposed can lead to higher prices which can discourage the consumption of certain goods
(iv) It could be used as anti-inflationary device. Government can do this by increasing direct tax without Increasing its expenditures.
(v) It can be used to protect "infant industries" High tariffs are imposed on the importation of goods similar to those that are produced by infant industries.
(vi) It is used to correct an adverse balance of payments. Importation of foreign goods could be restricted by the use of import duties thereby conserving foreign exchange. This will have a remedial effect on balance of payments
(vii) Taxation can be used to direct production and investment e.g. tax exemptions or rebates for industries located in rural areas.
(viii) Reduced taxes on profits and other incomes can stimulate investment.
(ix) Taxation can be used as a retaliatory measure in international trade.