The modern world witnessed changes in public finance as public expenditures and public revenue through different sources, particularly taxes entered different phases and junctures with every passing day, as a consequence the nature and significance of the welfare state whose functions and goalmouths have also experienced conversions and transformations. The welfare state is a public model in which the state is the main protagonist playing a strategic role in the safety and promotion of the economic and social development of its citizens. It is based on the canons of egalitarianism (Britannica Online Encyclopaedia). It is an amalgamation of democracy, welfare, and capitalism (Humphrey, 1950). The modern state is a welfare state countersigning important developments in the field of art, science, politics, warfare, and technology. It has also seen and will still eyewitness the drive of globalization, liberalization, and privatization which plays an important role in all round development of society in the modern age.
The welfare state is beyond what is seen and observed for it not only performs necessary functions of defence and maintenance of law and order but also performs optional well-being and progressive undertakings such as public health, education, cleanliness, rural development, water supply and so on. The expenditures in welfare state necessitate huge public investment. Taxes constitute the main basis of public finance whereby government raises revenue for public expenditure.
In contemporary times, modern day taxation is not just a tool for raising public revenue or to meet the public expenditures, but an important channel to cut demand in the private areas and reallocating, sorting out, and redeploying income and output levels in the economy. A tax should be optimal. An optimal tax theory or optimal taxation hypothesis aims at maximizing social welfare function subject to economic constraints (Gregory et al., 2009). Accordingly, it succeeds in achieving growth and development that maximizes social welfare together with achieving macroeconomic stabilization goals.
Adam Smith in his, “Wealth of Nations (1776)” highlighted the notion of an ideal tax meeting four essential canons: canon of convenience, payable at times and in ways convenient to the taxpayers which suggests that a tax must be convenient and beneficial having trickle-down effect , that is, it must not be at the cost of society and should promote social welfare, canon of certainty, certain to pay rather than arbitrary which suggests that a tax must not be subjective, canon of equality, tax should be proportionate to incomes which suggests that it must be as objective as possible thereby meaning that it should be imposed objectively and impartially, and canon of economy, cheap to administer and collect which means that it should incur minimum cost that is to say that cost of collecting tax must be minimal. In other words, good taxes according to Adam Smith should meet four major criteria: fair or in proportion to incomes, definite or sure to pay rather than random or capricious, allocated at times and in ways suitable to the taxpayers, and economical (Smith, 2015).
The Internal Revenue Service defines tax evasion as a careful or deliberate underpayment of taxes or simply the failure to pay taxes and whosoever is found guilty of tax evasion faces cumbersome penalties, fines, and custodial spell (FindLaw. n.d.). In order to avoid tax evasion and to accomplish balanced cum sustained growth and development targets, the government authorities must provide various tax incentives to the various sections of the population for they will encourage a particular economic activity or attract investment to a country, increase employment and capital allocations and transmissions, develop research and technology in the less developed areas of the countries in general and less developed countries in particular. Actually, tax incentives are those superiors egregations, indemnities, or deductions that offer distinct credits and favored tax rates which can fashion out as tax breaks for a limited spell, or condensed customs duties or import tariffs (Easson & Zolt, 2002).
Tax incentives are more or less role models for boosting both domestic as well as foreign investment. Healthy the tax incentive policies, schemes, and strategies are designed, carried out, and scrutinized, healthy and therefore useful will be the tax system. Tax evasion is very common in underdeveloped economies which is why they must endeavor to observe the costs and benefits analysis of tax system in general and tax incentives in particular, coupled with the virtual and comparative pros and cons of different kinds of incentives, and important deliberations, concerns, and reflections upon scheming, planning, granting and intensive caring of the use of tax incentives so as to boost investment decisions which in turn will generate income on the one hand and increase the productive capacity in an economy on another hand, improve growth and development prospects in an economy.
Easson, Alex and Zolt. M. Eric.(2002). Tax Incentives. Retrieved from http://siteresources.worldbank.org/INTTPA/Resources/EassonZoltPaper.pdf
Encyclopaedia Britannica. Welfare State. Retrieved from https://www.britannica.com/topic/welfare-state
FindLaw. n.d. What is Tax Evasion. Retrieved from https://tax.findlaw.com/tax-problems-audits/what-is-tax-evasion.html
Mankiw, N. Gregory; Weinzierl, Matthew; Yagan, Danny. (2009). Optimal Taxation in Theory and Practice. Journal of Economic Perspectives. 23 (4): 147–174.\
Marshall, Thomas Humphrey (1950). Citizenship and Social Class: And Other Essays. Cambridge: University Press
Smith, Adam. (2015). The Wealth of Nations: A Translation into Modern English. Industrial Systems Research. P.429. ISBN: 9780906321706
The author is a Research Scholar at the Department of Economics, Central University of Kashmir, an Academic Counsellor, IGNOU STUDY CENTRE 1209,S.P. College, Srinagar and an Editor in EPH – International Journal of Business and Management Science & Asian Journal of Managerial Science. She is also an Ezine Articles Expert Author; IJRULA title awards, 2018 winner (Best Researcher, 2018) and can be reached at: firstname.lastname@example.org