2/2/2023 Public Revenue Lecture 2 Dr. J. Onyango Learning Objectives a By the end of the lecture, the student should be able to; Understand the meaning and sources of public revenue 2 Critically analyse taxation as source of public revenue Explain the characteristics of an effective tax system 4 Understand the role of taxation in public finance Dr. J. Onyango2/2/2023 Meaning of Public Revenue 4 Public/National/Government revenue: Refers to all monies received by a government from taxes and non-tax sources to enable it to undertake public expenditure. » Those sources of income are ordinarily known as "revenue resources" 4 All monies a public authority may secure from any source to enable it to undertake public expenditure during any period of time is public receipts. > Public receipts includes borrowing and new money printed by the CBK. Dr. J. Onyango Sources of Public Revenue Non-Tax Revenue 4 This is made up of all revenues, other than taxes, that are generated by government to finance public expenditures. Examples include the following; Fee & rates, License fee, Fines and Penalties, Forfeitures, Escheat, Toll, Earnings from sales, Rent and royalties, dividend from investments, gifts and grants etc. Dr. J. Onyango2/2/2023 Sources of Public Revenue 2 Taxes a Tax revenue is the main source of finance for the public sector and citizens are the main contributors. 4 Tax is a compulsory contribution to state revenue, charged by the government on workers’ income, business profits, or added to the cost of some goods, services, and transactions. a Examples of taxes: individual income tax, corporate income tax, value-added tax, sales tax, capital gains tax, stamp duties, withholding tax, custom & excise duties. 6 J Onyango Theories of Taxation a Several theories of taxation exist in public economics. The major theories include; Physiocratic Theory 2 Financial or Expediency Theory 3 Socio-Political Theory 4 Benefit Received Theory Dr. J. Onyango2/2/2023 1. Physiocratic Theory The proponents of Physiocratic theory believed that the wealth of nations are derived solely from the value of "land agriculture" or "land development” and that these products should be highly priced. They maintained that land alone had the capacity to yield a net return and add to the wealth ofa nation. They therefore favoured single tax on land agriculture/development by the state. Dr. J. Onyango 2. Expediency Theory This theory states that every tax revenue collection proposal must pass the test of practicability. Practicability means tax policy will help the economy if it is anti-cyclical (economic stabilization), pro-equity (equality ) and favorable to the welfare of the society (growth & development) Dr. J. Onyango2/2/2023 3. Socio-Political Theory This theory states that social and political objectives should be the major factors in selecting tax collection proposals. The theory advocated that a tax system should not be designed to serve individuals, but should be used to cure the ills of society as a whole in so far as it is possible. For instance, the idea of using taxation as means of reducing income inequalities in society requires that all low income earners should be taxed lower or even exempted from taxation. Dr. J. Onyango Dr. J. Onyango 4. Benefit Received Theory The Benefit Received Theory suggest that taxes should help determine what activities the government will undertake and who will pay for them based on benefits received. Citizens who have received benefits from the government (in the form of public goods and services) should pay for them For example; toll charges, public college tuition, national park admission fees, and fuel taxes are some common examples.2/2/2023 Types of Taxes 1. Progressive Taxes: © Atax that takes a larger percentage of income from high-income groups than from low-income groups. Itis based on the taxable amount of an individual's income. Therefore tax rate, along with tax liability, increases as an individual's wealth increases, 1 Examples are; Personal income taxes, corporate taxes and sales tax on luxury items es TAX, [Family AY $10,000. a a [Family CT S100 coo 0% 310,000. 330,000. Dr. J. Onyango Types of Taxes 2. Regressive Taxes: A tax that takes a larger percentage of income from low-income groups than from high-income groups ie. The average tax burden decreases with income. 4 Technically, the share of personal income consumed or spent on a specific good declines as the level of personal income rises. Examples; property taxes, sales taxes, and excise taxes. EE Percentage amount of Paidintax| [Famny A [$10,000 S000 [Famiy 8 $50,000 $2,000 $100,000) $2,000 Dr. J. Onyango2/2/2023 Types of Taxes 3. Proportional Taxes Atax that takes the same percentage of income from all income groups so tax rate remains the same, regardless of income or wealth. Examples; stamp duty, VAT a The government assesses tax as a percentage of the value of the asset that a taxpayer purchases or owns. Ea ‘Amount of "Tax Family A $10,000) Family 6 Family C Dr. J. Onyango Principles of Taxation a Foran effective tax system, the following five primary conditions should be maximized to the greatest extent possible: | Fairness and equity - Horizontal & Vertical 2 Adequacy 3 Simplicity 4 Transparency 5 Administrative ease Dr. J. Onyango2/2/2023 Tax Impact and Incidence Taxes burdens are not always borne by the people who pay them in the first instance. They can often be shifted to other people. 2 Tax impact is the initial tax burden. It is upon the person from whom the tax is collected. a Tax incidence is the final tax burden. It is on the person whom ultimately bears the money burden of tax. Dr. J. Onyango Theories of Tax Shifting and Incidence According to the modern theory, incidence means the changes brought about in income distribution by changes in the budgetary policy. We examine the following three major theories 1. Concentration or Surplus Theory 2. Diversion or Diffusion Theory 3. Demand and Supply Theory Dr. J. Onyango2/2/2023 Direct and Indirect Taxes a Direct taxes are non-transferable where the tax flow is direct from the taxpayer to the Government. a When the liability of tax falls on the same person who has to make payment of it, then the tax is said to be direct i.e. corporate tax, capital gains, income tax, estate tax. a Indirect taxes are transferable taxes where the liability to pay can be shifted to others. A tax is said to be indirect if its burden is shifted finally to the consumer examples include; Sales taxes, Ad valorem tax & stamp duty, excise duty, custom duty Dr. J. Onyango 4 Encourage savings and investment as well as foreign exchange remittance Dr. J. Onyango The Role of Taxation in Economic Development 4 Redistribution of income and wealth a Ensuring price stability a Financing public projects/expenditures 4 Generation of employment 4 Discouragement of some consumptions 2 Encourage private sector industrialization 2 Encourage export and discourage imports a Achievement of government social objectives 2 Achievement of government economic objectives2/2/2023 Self - Test Discus the role of taxation in public finance Briefly discuss any three theories of tax incidence Briefly discuss any three theories of taxation Describe the following concepts as used in public finance \ Tax burden and Real burden i. Forward shifting and Backward shifting ii Vertical equity and horizontal equity ‘Tax avoidance and tax evasion Dr. J. Onyango Public Revenue Dr. J. Onyango END 10