(a) What is a tax? (b) Distinguish between tax evasion and tax avoidance. (c) Identify any four benefits of tariffs.

Answer Details

(a) A tax is a compulsory payment imposed by government on individuals, firms or goods, for which the payer receives no direct return, used to finance public spending.

(b) Tax evasion versus tax avoidance:

• Tax evasion is the illegal refusal or failure to pay tax that is lawfully due, for example by understating income or falsifying records. It is an offence punishable by law.
• Tax avoidance is the use of legal means to reduce one's tax liability, for example by claiming all allowances and reliefs or arranging affairs to fall in a lower tax band. It is lawful, though sometimes considered unethical.

(c) Four benefits of tariffs (taxes on imports):

• Revenue: tariffs are a source of income for the government.
• Protection of infant industries: they make imports dearer, allowing young domestic industries to grow.
• Correcting balance-of-payments deficit: by discouraging imports they help improve the trade balance.
• Protecting local employment and guarding against dumping of cheap foreign goods.