PART I INTRODUCTION

1.1. Tax: basic concepts :

 A tax is a compulsory, unrequited payment to
government.

 Taxes are unrequited in the sense that benefits

provided by government to taxpayers are not
normally in proportion to their payments…”

 A tax is a compulsory levy made by public

authorities for which nothing is received directly in
return.
Government compels the payment of taxes:

-tofund services which are mainly public and which

cannot be provided through the market system;

-people otherwise would not be willing to pay for

these services;

◦ Market failure – missing market

-toaccomplish some redistribution role;

-address some issues (externalities)-like impact of
smoking, getting drank etc.
 Government revenues may be raised from
different sources

 Government may charge fees for certain services such as registration of

legal documents,

 If the fees exceed the costs of such services, the excess may be
considered as tax;

 Fines for certain offences (e.g., tax evasion): fines are compulsory
payments without direct benefits accruing to payers;

 But fines are not taxes; they are levied to curb certain offences not to
raise revenue;
 Why do governments bother to tax?
Alternatively, governments could:
 Finance their expenditures by printing money;
 Compulsorily seize the goods or services they
need, or
 Borrow money.

Problems with the above alternatives:

 Printing money merely debases the currency and
causes inflation;
 Compulsory acquisition is a crude and not very
fairly distributed form of impost and in any event
requires just compensation and
 Borrowed money must be repaid or interest bill
met.
 Level of taxation

 Tax to GDP ratio as a measure of level of taxation;

 Tax to GDP ratios are not completely comparable;

 In Ethiopia, tax revenue - the principal
source of government’s revenue;

 About 10% GDP

 Cover over 70% of expenditures

 Tax revenue is generated by mainly indirect

taxes

 High reliance on foreign trade taxes/

indirect taxes