Discuss Taxation As An External Source Of Financing In Economic Development?

In the early stages of economic development, savings by the business sector and house holds are not sufficient to meet the requirements of development. Therefore taxations an instrument to curb consumption and increase savings is an effective source. Both direct and indirect taxes can play a major role in diverting resources towards the state to be spent on development plans.

For achieving best results, taxes should be imposed on non entrepreneurial incomes and luxury consumption, but in developing countries, where most of the income of majority is spent on necessities, the taxation of non functional surplus may not yield sufficient funds. Therefore, to raise sufficient finances for development, the government inevitably extends the coverage of indirect taxes to commodities of mass consumption. More over, agriculture tax has to pay an important role in the mobilization of resources for the public sector in a developing economy.

Thus taxation is the most important means available to the state for mobilizing national resources for economic development. But care has to be taken that while forced savings are increased, voluntary savings should not be affected adversely. Public borrowing is another method by which the savings of the community can be mobilized. A successful borrowing policy requires financial institutions to be developed and extended in to the rural sector of the economy.

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