Public Finance - Government Revenue and Taxation

direct taxes

all taxes which cannot be passed on third parties or the final consumer by the initial tax payer are considered as direct taxes. these include corporate and personal income taxes, capital gains and gift taxes etc.

the main sources of government revenue are:

1. taxes on international transactions; 2. taxes on domestic goods and services (include petroleum tax); 3. taxes on income and property; 4. non-tax revenue, and 5. grants.

the main role taxation plays in the national economy are:

1. to raise revenue to defray the cost of services produced by the state; 2. to reduce inequalities arising from distribution of wealth; 3. to restrain certain types of consumption, e.g., alcoholic beverages; 4. to protect home industries, and 5. to control certain aspects of the country's economy, e.g., balance of payments, employment, savings, investment and productivity.

non-tax revenue of the government is divided into 3 sections:

currency, coinage and mint interest receipts other non-tax revenue

the requirements for a

good\\ tax system a good tax system must have the following characteristics.\\ neutrality equity efficiency convenience certainty

1. neutrality

a tax system can be said to be fiscally neutral if it does not discriminate between economic choices. this means that the introduction of any tax system should not change the economic choices made by tax payers.

indirect taxes

indirect taxes, on other hand are those taxes, the burden of which can be transferred with relative ease by the initial payer to third parties.

the role of taxation in the national economy there are two broad objectives of virtually all taxation system. these can be classified into

revenue and non-revenue objectives.

3. economy

• a good tax should be economical to the government. the administrative cost of collecting and enforcing the tax should be reasonable in comparison with total revenue generated by the tax.

2. certainty

• people should be able to determine their true liability with a fair degree of accuracy. tax payers should be clear in their minds as to how much is owing and payable at any point in time.

4. equity

a good tax should be fair to the people who are required to pay it. a tax is said to be horizontally equitable if it treats equals equally. in other words, it refers to a tax system so designed that persons with the same income level pay the same amount of tax the vertical equity criterion on the other hand, refers to a tax system designed that persons higher income levels pay more tax than persons with lower incomes

definition of taxation

a tax is a compulsory levy payable by an economic unit to the government without any corresponding entitlement to receive a definite and direct quid pro quo from the government.

capital receipts

capital receipts of the government take many forms. the most important one comes from fresh borrowings which can be classified in terms of their origin and maturity etc. for example, on the basis of their origin, public borrowing may be external (i.e. from outside the country), or internal (i.e. from within the country). in terms of maturity, there may be non-terminal or perpetuities), \\long term\\, \\medium term\\, or \\short term\\ loans with specific demarcation of boundaries for each. they may be marketable or non-marketable, interest-free or interest bearing, etc.

engaging in productive activities

government in some instances engage in some productive activities and the profits accruing to such operations accrue to the government. one such area is lotteries, operated by the national lotteries authority (nla). government also invests in businesses by owning shares in such businesses and the dividends accruing forms part of government revenue.

user charges

these are 'prices' charged for voluntarily purchased, publicly provided items or services that, while benefitting specific individuals or businesses are closely associated with basic government responsibilities. examples of user charges include charges paid for waste disposal, airport landing (departure fees), ambulance charges, health insurance premium.

donations

these are voluntary contributions to governments that are made by individuals, organizations, governments of other countries, as well as non-governmental organizations. such donations are usually meant for specific projects or particular programmes, for example to aid victims of a natural disaster like donations to nadmo to assist flood victims.

revenue receipts

these receipts are divided into tax-revenue and non-tax revenue.

government -induce inflation

this refers to expansion in the money supply in the economy geared towards the payment for government-supplied goods and services, leading to sustained annual increase in prices. the idea being that this will lead to inflation and cause people to reduce their spending and savings thus allowing for reallocation of resources by government to public use for long periods.

debt finance

this refers to the use of borrowed funds to finance government expenditures and activities. the borrowing could be from internal or external sources and those who loan funds to the government do so at their own free will. the internal or domestic borrowing entails the government issuing bonds, treasury bills and so on, which embodies the promise of the government to repay the loan with interest at some future date.

although the main sources of revenue to government is from taxation, there are other sources of revenue to government. these sources of revenue to government include:

user fees and licenses; user charges; engaging in directly productive activities; debt finance; donations; and government-induce inflation

user fees and licenses

user fees are payments for goods or services sold or rented by the government, voluntarily purchased and not generally shared. they include highway tolls, public parking, spaces, fees from use of government land and permits and licenses not associated with regulation. a license is a fee levied by government as a condition for exercising of a business or non-business privilege. it is usually a flat rate and is graduated by the type of activity. these include vehicle examination licenses, licenses issued by the food and drugs board,

tax-revenue itself is divided into three sections

taxes on income and expenditure taxes on property and capital transaction taxes on commodities and services

forms of taxes two broad classes of taxes can be identified.

these are direct taxes and indirect taxes.

a. currency, coinage and mint:

this category covers the receipts of currency note, bank notes, and security paper. profit from circulation of small coins is also included.

b. interest receipts, dividends and profits:

this section comprises apart from interest receipts on loans by the government to other parties, dividends, and profits from public sector undertakings run by or as government departments.

a. taxes on income and expenditure:

this section covers all those taxes which are levied on receipts of income and expenditures such as corporation tax, income tax, and similar other taxes, if any in force.

c. other non-tax revenue:

this section covers revenue from various government activities and services such as from administrative services, public service commission, police, agriculture and allied services, transport and communication, public works, education, housing, grant-in-aid and contributions etc.

b. taxes on property and capital transaction:

this section covers taxes on specific forms of wealth and its transfers such as estate duty, wealth tax, gift tax, house tax, land revenue and stamps and registration fees, etc.