Everyone understands why we pay taxes - the government needs money to fund its programs, from infrastructure and defense to public education and immigration assistance. But apart from being simply a source of government revenue, taxes can be used in various ways to manipulate people by forcing or encouraging certain types of behavior. Let’s take a look at some.

Progressive tax systems are used by most developed countries, including Canada, to re-distribute wealth or, essentially, force the rich to give some of their money to the poor. The way it works is your income up to a certain amount is taxed at the lowest rate, income above that level but below the next level is taxed at a higher rate, income above that second level but below the next level at even higher rate, etc. This way, everybody pays the same amount of tax on the minimum amount of income, and those who make more pay higher tax on the extra amount.

Many countries use taxes to stimulate certain lifestyles. For example, your taxes may be reduced if you are married and have children. Taxes are often reduced if you pursue post-secondary education. Charitable contributions are often tax deductible or generate tax credits. For example, in Canada taxpayers get a 43.7% charitable tax credit on contributions above $200 per year. These contributions, however, are limited to 75% of your annual income or 100% at death. There are tax benefits that encourage people to use public transportation, engage in healthy lifestyle, build or renovate houses, etc.

Taxes also play an important role in defining the way businesses operate. For example, in Canada an incorporated doctor or lawyer will pay significantly less income taxes than they would without incorporating their practices. Also, private corporations pay much lower tax on income below $500,000 a year. This encourages entrepreneurs to keep their income under this threshold by structuring their businesses appropriately.

The problem with trying to use income taxes to influence behavior is that it makes collecting and administering taxes more complex. This requires more staff, increases expenses and makes abuse easier. This practice also makes it very difficult for taxpayers to report their income and creates many jobs for those who make their living by helping regular people with their taxes. There is a general consensus among the international tax experts that taxation should be simplified and the use of taxes to manipulate people should be minimized. But that is not likely to happen soon, and we need to understand our system in order to take advantage of it.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.