To meet expenditure, Governments need an equally large income.

There are four main sources from which this income is obtained.

They are:

(a) Taxes, direct and indirect.


(b) Prices; earnings of State’s commercial and industrial undertakings.

(c) Fees and assessments.

(d) Loans.

In addition to these, there are some minor sources, such as fines and penalties, reparations and indemnities, tributes and gifts.


We discuss these sources below:

(a) Taxes:


Taxes are the most important source of State revenue today. A tax has been defined as a “compulsory contribution of the wealth of a person or a body of persons for the services of the public powers.”—(Bastable).

In this definition, two points should be carefully noted:


(i) A tax is a compulsory payment. Nobody can escape taxation if his income has reached the assessable limit;

(ii) A particular tax is not, normally speaking, a price for any particular service performed by the State.

Were it so, it could not be compulsory for those who did not use that service. “The essence of a tax”, says Prof. Taussig, “‘as distinguished from other charges of government, is the absence of a direct quid pro quo between the taxpayer and the public authority.”

In other words, you cannot refuse to pay a tax on the ground that you do not use a service. A rich man may be childless but he has to pay taxes spent on schools. Taxes are mea it to cover the general expenses of the State and are not levied for any particular purpose. Hence, the Government does not promise to perform a specific service in return for the payment of a particular tax.

Motives behind Taxes:

Taxes are mostly levied with the object of raising revenues. A penalty, on the other hand, is imposed to stop people from doing certain things. Sometimes a tax may be levied which does both. It may bring in some revenue and also check people from consuming some harmful articles like opium. Besides, certain taxes may be of the nature of protective duties.

They are levied in order to protect some home industry against foreign competition. Sometimes a tax has another motive in view. It aims at removing the inequalities ill the distribution of wealth in a society. Well-to-do people may be taxed to provide services like free schooling and free medical aid for the poor. Thus, raising revenue is not the only purpose for which taxes are levied.

(b) Prices: Earnings of State Enterprises:

When a Government engages in a business enterprise, it sells the service to the consumer at a fixed price. The consumer is free to use the services or not. For example, if you use a railway train or send a telegram or a letter, you pay the fixed price; .there is no extra burden on you. Governments do not usually undertake these enterprises for the sake of profit, but to provide such services to the people as can either be provided only by Government or can better be provided by them than by any private agency.

However, nowadays Governments undertake in addition certain activities like trade, industry, and business with the idea that the huge profits earned should not go into private pockets, but should be used for the welfare of the nation.

(c) Fees and Assessments:


A fee is a payment made by a person to the Government on account of a special benefit received by him. For instance, there are patent fees court fees, tuition fees, etc. In every case, there is a specific benefit enjoyed by a person for which he pays the fee. A special assessment is a particular fee charged from persons by the Government, for example, for a new canal or a new rail-road, a drain, etc.

(d) Loans:

Besides taxes, fees, etc., loans are raised by Governments in emergencies like wars or to finance economic development plans or when a costly enterprise like a new railway line or a steel plant or a multipurpose project has to be undertaken. Since the benefit from such enterprises accrues to future genera­tions even more than to the present ones, it is reasonable that their burden should also fall on them.

Hence loans, and not taxes, are raised to meet them. Loans are nowadays also raised for financing plans of economic development. Loans are also raised for the prosecution of a war.