1. Mobilisation of Resources
The first and the foremost objective of taxation in a developing economy should be to maximise the level of aggregate saving by applying a cut to the actual and potential consumption of the public at large. It then becomes necessary to collect more revenues mainly in the form of taxes, a major part of which will have to come from the rich, who constitute as small section of the society, mainly in the form of direct taxes
2. Taxation as an Instrument of Economic Stability
The under-developed countries are very susceptible to three sources of instability which results from the nature of their economy and the logic of accelerated economic development.
a. Instability caused by world market developments;
b. Instability due to cyclical deficiency of effective demand in the short run, and
c. Instability caused by inflationary pressures
3. The Re-allocative Role of Taxation
The tax system in order to ensure effective allocation of resources should interfere as little as possible with the consumers’ choices for consumption goods and the producers’ choices regarding the use of factors of production. The owners of factors of production should be enabled to seek their most remunerative employment and the price mechanism should be allowed to operate freely so that there is optimum output of goods. Under this condition, it is essential that the tax system should be economically neutral and framed in such a way as to ensure the optimal allocation and utilisation of the productive resources of the economy.
4. The Re-distributive Objective of Taxation.
The under-developed countries are characterised by the existence of extreme inequalities in the distribution of income and wealth and a large proportion of saving of the upper income groups is misdirected. Besides, in some of the under-developed countries, the consumption propensities of the upper income groups are higher than those of the upper income groups of the developed countries. Thus, there exists a large volume of avoidable inequality in the economy of the under-developed countries. Therefore, a good redistribution objective of the-tax system in a developing country should be an instrument for the reduction of economic inequalities by redistributing the income through bridging the gap between the rich and the poor. The very purpose of taxation is not merely to raise revenues for the state but the revenues should be raised in such a manner as to ensure that the burden of tax should fall on the rich in the form of wealth-tax, income-tax, etc. and the proceeds, if possible, should be spent for the benefit of the poor.
5. Growth Objective of Taxation
The Government, in any economy, attempts to use taxation to achieve many goals, and mobilisation of resources for the government in a less-developed country is one of them. To see that taxes are paid and collected, a tax system has to have a proper administrative set up. In addition, the taxes should be equitable. From the point of view of the growth of the economy, its industries, trade, agriculture, consumption, etc., the tax policy has to be such that it does not upset the pattern of production, trade, consumption, savings, and investment in the economy.