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3. PRICES
Prices-are-those-amounts-which-are-received-by-the-central-or-local-authority-for-commercial-services-
e.g.-railway-fare,-postage-and-revenue-stamps,-telephone-charges,-radio-and-television-advertisement-etc.

4. EXTERNAL-BORROWING
This-is-done-from-international-financial-institutions-such-as-World-Bank-and-IMF.--Other-foreign-
government-are-also-lenders.

5. FINES-AND-PENALTIES
If-individuals-and-firms-do-not-obey-the-laws-of-the-country,-fines-and-penalties-are-imposed-on-them.-
Such-fines-and-penalties-are-also-the-income-of-the-government.

6. STATE-PROPERTY
Some-land,-forests,-mines,-national-parks,-etc.-are-government-property.-The-income-that-arises-from-
such-property-is-also-another-source-of-public-revenue.-The-income-will-arise-from-payment-of-rents,-
royalties,-or-sale-of-produce.

7. INTERNAL-BORROWING
The-government-usually-raise-revenue-through-issue-of-treasury-bills-and-treasury-bonds-in-the-local-
market.

THE-PURPOSES-OF-TAX
The-raising-of-the-revenue-is-not-the-only-purpose-for-which-taxes-are-levied.-The-taxes-are-levied-for-
various-purposes-as-follows:

a. Raising-Revenue
The-main-purpose-of-imposing-taxes-is-to-raise-government-income-or-revenue.-Taxes-are-the-major-
sources-of-government-revenue.-The-government-needs-such-revenue-to-maintain-the-peace-and-
security-in-a-country,-to-increase-social-welfare,-to-complete-development-projects-like-roads,-schools,-
hospitals,-power-stations,-etc.

b. Economic-Stability
Taxes-are-also-imposed-to-maintain-economic-stability-in-a-country.-In-theory,-during-inflation,-the-
government-imposes-more-taxes-in-order-to-discourage-the-unnecessary-expenditure-of-the-individuals.-
On-the-other-hand,-during-deflation,-the-taxes-are-reduced-in-order-to-encourage-individuals-to-spend-
more-money-on-goods-and-services.-The-increase-and-decrease-in-taxes-helps-to-check-the-big-
fluctuations-in-the-prices-of-goods-and-services-and-thus-maintain-the-economic-stability.

c. Protection-Policy
Where-a-government-has-a-policy-of-protecting-some-industries-or-commodities-produced-in-a-country,-
taxes-may-be-imposed-to-implement-such-a-policy.-Heavy-taxes-are-therefore-imposed-on-commodities-
imported-from-other-countries-which-compete-with-local-commodities-thus-making-them-expensive.-The-
consumers-are-therefore-encouraged-to-buy-the-locally-produced-and-low-priced-goods-and-services.-

d. Social-Welfare
Some-commodities-such-as-wine,-alcoholic-drinks,-tobacco,-cigarettes,-etc.-are-harmful-to-human-
health.-To-discourage-wide-consumption-of-these-harmful-commodities,-taxes-are-imposed-to-make-
the-commodities-more-expensive-and-therefore-out-of-reach-of-as-many-people-as-possible.

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e. Fair-Distribution-Of-Income
In-any-country,-some-people-will-be-rich-and-others-will-be-poor-due-to-limited-opportunities-and-
numerous-hindrances-to-becoming-wealthy.-Taxes-can-be-imposed-which-aim-to-achieve-equality-in-
the-distribution-of-national-income.-The-rich-are-taxed-at-a-higher-rate-and-the-amounts-obtained-are-
spent-on-increasing-the-welfare-of-the-poor.-That-way,-the-taxes-help-to-achieve-a-fair-distribution-of-
income-in-a-country.

f. Allocation-Of-Resources
Taxes-can-be-used-to-achieve-reasonable-allocation-of-resources-in-a-country-for-optimum-utilization-
of-those-resources.-The-amounts-collected-from-taxes-are-used-to-subsidise-or-finance-more-
productive-projects-ignored-by-private-investors.-The-government-may-also-remove-taxes-on-some-
industries-or-impose-low-rates-of-taxes-to-encourage-allocation-of-resources-in-that-direction.

g. Increase-In-Employment
Funds-collected-from-taxes-can-be-used-on-public-works-programmes-like-roads,-drainage,-and-other-
public-buildings.-If-manual-labour-is-used-to-complete-these-programmes,-more-employment-
opportunities-are-created.

POWER-TO-TAX
The-laws-of-a-country-will-authorise-the-government-(central-or-local-authority)-to-levy-taxes.-The-taxes-
imposed-are-legally-enforceable-and-must-be-paid-by-all-those-individuals-and-organisations-that-come-within-
the-jurisdiction-of-the-taxing-authority.-There-are-fines-and-penalties-for-failure-to-pay-taxes.
The-parliament-and-local-councils-have-the-power-to-pass-laws-and-by-laws,-respectively,-that-govern-taxes.-
As-people's-representatives-sit-in-parliament-and-councils,-the-final-power-to-tax-rests-with-the-people.

In-our-country,-the-Central-Government-and-the-Local-Authorities-(municipal,-town,-urban,-and-county-
councils)-are-authorised-to-impose-taxes.-Every-year-in-June,-the-Minister-for-Finance-presents-the-budget-
before-Parliament-(National-Assembly).-Briefly,-the-budget-is-a-statement-of-the-government-expenditure-and-
the-sources-of-funds-to-finance-the-expenditure.-The-Local-Authorities-must-also-present-their-annual-
budgets.-The-purpose-of-presenting-budgets-which-have-to-be-approved-by-the-relevant-authorities-is-that-all-
taxes-that-are-imposed-must-be-approved-and-authorised.

The-main-taxes-of-the-Central-Government-are-usually-value-added-tax,-income-tax,-custom-duty,-excise-
duty,-stamp-duty,-etc.-The-main-taxes-of-a-local-authority-are-usually-rates,-poll-tax,-fees,-service-charge,-etc.

PRINCIPLES-OF-AN-OPTIMAL-TAX-SYSTEM

The-principles-of-an-optimal-tax-system,-what-are-known-as-Canons-of-taxation-were-laid-down-by-Adam-
Smith.

1. Simplicity
A-tax-system-should-be-simple-enough-to-enable-a-taxpayer-to-understand-it-and-be-able-to-compute-
his/her-tax-liability.-A-complex-and-difficult-to-understand-tax-system-may-produce-a-low-yield-as-it-
may-discourage-the-taxpayer's-willingness-to-declare-income.-It-may-also-create-administrative-
difficulties-leading-to-inefficiency.-The-most-simple-tax-system-is-where-there-is-a-single-tax.-However,-
this-may-not-be-equitable-as-some-people-will-not-pay-tax.

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2. Taxable-Capacity
This-refers-to-the-maximum-tax-which-may-be-collected-from-a-taxpayer-without-producing-
undesirable-effects-on-him.-A-good-tax-system-ensures-that-people-pay-taxes-to-the-extent-they-can-
afford-it.-There-are-two-aspects-of-taxable-capacity.

a) Absolute-taxable-capacity
b) Relative-taxable-capacity

Absolute-taxable-capacity-is-measured-in-relation-to-the-general-economic-conditions-and-individual-
position-e.g.-the-region,-or-industry-to-which-the-taxpayer-belongs.

If-an-individual,-having-regard-to-his-circumstances-and-the-prevailing-economic-conditions-pays-more-
tax-than-he-should,-his-taxable-capacity-would-have-been-exceeded-in-the-absolute-sense.

Relative-taxable-capacity-is-measured-by-comparing-the-absolute-taxable-capacities-of-different-individuals-
or-communities.

3. Administrative-Efficiency
A-good-tax-system-should-be-capable-of-being-administered-efficiently.-The-system-should-produce-
the-highest-possible-yield-at-the-lowest-possible-cost-both-to-the-tax-authorities-and-the-taxpayer.

The-tax-system-should-ensure-that-the-greatest-possible-proportion-of-taxes-collected-accrue-to-the-
government-as-revenue.

4. Neutrality
Neutrality-is-the-measure-of-the-extent-to-which-a-tax-avoids-distorting-the-workings-of-the-market-
mechanism.-It-should-produce-the-minimum-substitution-effects.-The-allocation-of-goods-and-services-
in-a-free-market-economy-is-achieved-through-the-price-mechanism.-A-neutral-tax-system-should-not-
affect-the-taxpayer's-choice-of-goods-or-services-to-be-consumed.

5. Certainty
The-tax-should-be-formulated-so-that-taxpayers-are-certain-of-how-much-they-have-to-pay-and-when.-
The-tax-should-not-be-arbitrary.-The-government-should-have-reasonable-certainty-about-the-
attainment-of-the-objective(s)-of-that-tax,-the-yield-and-the-extent-to-which-it-can-be-evaded.-There-
should-be-readily-available-information-if-taxpayers-need-it.

Certainty-is-essential-in-tax-planning.-This-involves-appraising-different-business-or-investment-
opportunities-on-the-basis-of-the-possible-tax-implications.-It-is-also-important-in-designing-remuneration-
packages.-Employers-seek-to-offer-the-most-tax-efficient-remuneration-packages-which-would-not-be-
possible-if-uncertainty-exists.

6. Convenience
The-method-and-frequency-of-payment-should-be-convenient-to-the-taxpayer-e.g.-PAYE.-This-may-
discourage-tax-evasion.-For-example,-it-may-be-difficult-for-many-taxpayers-to-make-a-lump-sum-
payment-of-tax-at-the-year-end.-For-such-taxes,-the-evasion-ratio-is-quite-high.

7. Equity
A-good-tax-system-should-be-based-on-the-ability-to-pay.-Equity-is-about-how-the-burden-of-taxation-is-
distributed.-The-tax-system-should-be-arranged-so-as-to-result-in-the-minimum-possible-sacrifice.-
Through-progressive-taxation,-those-with-high-incomes-pay-a-large-amount-of-tax-as-well-as-a-regular-
proportion-of-their-income-as-tax.

Equity-means-people-in-similar-circumstances-should-be-given-similar-treatment-(horizontal-equity)-and-
dissimilar-treatment-for-people-in-dissimilar-circumstances-(vertical-equity).-

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