Chapter 01

Ethiopian Civil Service University
College of Finance, Management and Development
Advanced Public finance & Taxation
Thursday, November 23, 2023 1

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
MODULE DESCRIPTION
This module intends to provide the students with concepts and

practices of public finance and taxation.
It offers students with additional knowledge on matters dealing with
public finance and taxation in both the local and the international
sectors.
The module describes public financial systems that comprise taxation,

public expenditure, deficit financing and public financial regulations.
Thursday, November 23, 2023 Dr.Messele Getachew 2

Learning Outcomes
After completion of the module students will be able to:
 Understand the thoery and practice of public finance with especial reference
to Ethiopia
 Understand various tax laws applicable in general and with special
reference to Ethiopia as well as to other countries.
 identify the characteristics of taxes and taxation in general;
 understand the objectives and principles of a tax policy and conflicts among
some of them;
 explain the problems in the application of the principles of a tax policy like
equity principle;
 comprehend the types of taxes and tax system and practical problems in
deciding on tax bases (income, value added and other tax bases);
Thursday, November 23, 2023 3

Learning Outcomes
After completion of the module students will be able to:

 explain the various issues in international taxation regime
including issues of taxation of foreign source incomes,
international double taxation and international tax avoidance
through subsidiaries and transfer prices;
 comprehend on the role of taxation in financial decision
makings such as investment, dividend and finance decisions;
 Distinguish between tax avoidance and evasion; and
 Examine the Ethiopian tax system in the context of the
theoretical underpinnings of taxation.

MODULE CONTENTS
1. Public Finance – General Introduction
2. Fiscal Federalism and Power of Taxation
3. General Overview of Taxation
4. Ethiopian Tax Structure
5. International Trade Taxes
6. Economic Impact of Taxation
7. Fiscal Administration and Tax Administration Reform .

ASSESSMENT
As part of assessment on the course students will
Test (20%), (Ch 1 and 2)
Nov 15,2023
Article review report (20%)
Submission Deadline: Dec 15,2023
Group Assignment 20%(Ch 4)
Submission Deadline: Dec 31,2023
Final examination (40%)
CHAPTER ONE
PUBLIC FINANCE – GENERAL INTRODUCTION

Learning Objectives
• Identify the problems and issues addressed in the discipline
of public finance
• Discuss ways to think about the role of the public sector in
an economy

The Field of Public Finance
 Public finance is field of study in economics that is concerned with

the financial activities of the public sector—that part of the economy
controlled by governments
 Richard Musgrave definition: The complex of problems that center
around the revenue-expenditure process of government is referred to
traditionally as public finance

What is Public Finance?
• Very few areas of our lives are untouched by the public sector.
• All policies of the public sector confer benefits upon and exact costs from
members of the society

What is Public Finance?
• Public finance is the study of how spending and tax policies influence our
economic lives.
• In examining how governments influence our lives, public finance
addresses one fundamental issue: why do we want the public sector to exert
such powerful influences over our lives & public finance, a sub discipline of
economics ( also known as public sector economics or just public
economics), provides us with a framework for understanding changing and
improving the ways in which the public sector influences our lives

• We want to know:
– Which activities it is sensible for governments to perform
– The right quantities of public goods and services that should be
provided
– And the best method of paying for those services

• We care about public sector activity at all levels:
– Federal
– State
– Local

Explanation of Public Economics From the Handbook of Public
Economics
• We attempt to explain why government behaves as it does,

how its behavior influences the behavior of private firms
and households, and what the welfare effects of such
changes in behavior are
• Notice the why, how, and what aspects of this statement

Private and Public Interests
• Individual rights versus social responsibility
• Adam Smith’s roles of government
• Musgrave’s economic roles of government
• Public and private aspects of the economy:
Allocation of Resources
• Institutional limitations on market allocation of
resources
J. M. Keynes on the Problems to be Solved
“The political problem of mankind is to combine three things:

economic efficiency, social justice, individual liberty”

Public and Private Aspects of the Economy: Allocation of
Resources
• Market and non-market allocation of resources

• Factors of production like land, labor, and capital are all
allocated by market mechanisms

Institutional limitations on market allocation of
resources
• Institutions have been crafted at all levels of government to

provide boundaries within which the market mechanism
may operate
• For example, the Federal Aviation Administration (FAA)
regulates the behavior of airlines and operates to assure air
travel safety
Adam Smith’s Roles of Government
(1776)
• The first duty of the sovereign [is] that of protecting the society from
the violence and invasion of other independent societies
• The second duty of the sovereign [is] that of protecting, as far as
possible, every member of the society from the injustice or
oppression of every other member of it, or the duty of establishing
an exact administration of justice

Adam Smith’s Roles of Government
• The third and last duty of the sovereign or commonwealth is that of

erecting and maintaining those public institutions and those public
works, which, though they may be in the highest degree advantageous
to a great society, are, however, of such a nature, that the profit could
never repay the expense to any individual or small number of
individuals, and which it therefore cannot be expected that any
individual or small number of individuals should erect or maintain

Musgrave’s Economic Roles of Government
• Allocation
• Distribution
• Stabilization

Allocation Role of Government
• Allocate resources in public sector Involves making

decisions on public expenditure programs to provide the
public goods and services citizens desire at tax/fee rates
they are willing to pay

Distribution Role of Government
• Given output of economy (measured in GDP or other

terms), the question is who receives the benefit of that
production?
• If the distribution provided by the market mechanism is
unacceptable, there is a role for government to redistribute
income or wealth

Stabilization Role of Government
• Stabilize output, employment, and prices

Public and Private Aspects of the Economy
• Market and non-market allocation of resources
• Institutional limits on the market allocation of resources

Scope of Public Finance:
• The Subject matter of the public finance is classifies under five
broad categories. They are:
1. Public revenue
2. Public Expenditure
3. Public debt
4. Financial administration
5. Economic stabilization

Public Revenue Source
• Public revenue is the means for public expenditure. Various
sources of public revenue are:
a. Tax revenue
b. Non-tax revenue

Public Revenue Source…
A)Tax revenue: - Taxes are compulsory payments to government
without expectation of direct return or benefit to tax payers.
It imposes a personal obligation on the taxpayer.
Taxes received from the taxpayers, may not be incurred for their benefit
alone.
Taxation is the powerful instrument in the hands of the government for
transferring purchasing power from individuals to government.
The objectives of taxation are to reduce inequalities of income and
wealth; to provide incentives for capital formation in the private
sector, and to restrain consumption so as to keep in check domestic
inflationary pressures.
Public Revenue Source…
B)Non-tax revenue:- This includes the revenue from government
or public undertakings, revenue from social services like
education and hospitals, and revenue from loans or debt service.
To sum up, non-tax revenue consists of:

Interest receipts
Dividends and profits
Fiscal services and others.

Public Expenditure theories
• Government of a country has to use its expenditure and revenue
programs to produce desirable effects on national income,
production, and employment.
• The role of public expenditure in the determination and
distribution of national income was emphasized by Keynes.
• Public expenditure plays the dual role of administration and
economic achievement of a nation.

Public Expenditure theories…
• Hence planned expenditure and accurate foresight of earnings
are the important aspects of sound government finance.
• Public expenditure is done under two broad heads viz.,
developmental expenditure and non-developmental expenditure.
• developmental expenditure includes social and community
services, economic services, and grants in aid.
• non-developmental expenditure mainly consists of interest
payments, administrative services, and defense expenses.
• Expenditure can also be classified into revenue and capital
expenditure.
Public Debt/ Deficit Financing
• This category deals with the causes, methods and problems of
public borrowings and its management.
• This includes both internal debt and external debt.
• Debt raised for productive purpose will not be a burden on the
economy.
• There are many objectives of creation of public debt. Debt may
be raised to meet the normal current expenditure, exigencies
like war, finance productive government enterprise, finance
public social welfare and economic development.

• Measures of debts and deficits are widely used to estimate the
risks of fiscal crises.
• They also enter into assessments of the sustainability of the
government’s tax and spending policies and thus judgments
about intergenerational equity.
• Deficits are used to estimate whether the government’s fiscal
policy is stimulating or constraining the rest of the economy.
• Debt must be measured to determine whether high levels
inhibit economic growth. And estimates of spending and
revenue must be made to assess the impact of the size of
government on economic growth and other variables.
• Although the budget deficit and the public debt feature prominently
in political debate and economic research, there is no agreement
about how they should be measured.
• They can be defined for different sets of public institutions,
including the nested sets corresponding to central government,
general government, and the public sector, and, for any definition of
government, there are many measures of the debt and deficit,
including those generated by four kinds of accounts (cash, financial,
full accrual, and comprehensive), which can be derived from four
nested sets of assets and liabilities.
• Each debt and deficit measure says something about public
finances, but none tells the whole story. Each is also vulnerable to
manipulation, and is likely to be manipulated if it is subject to a
binding fiscal rule or target.
Public Financial Management
• Public financial management entails the development of laws,
organizations and systems to enable sustainable, efficient,
effective and transparent management of public finance.
• Public financial management (PFM) is an essential part of the
development process.
• Sound PFM supports aggregate control, prioritization,
accountability and efficiency in the management of public
resources and delivery of services, which are critical to the
achievement of public policy objectives, including achievement
of the Millennium Development Goals (MDGs).
• In addition, sound public financial management

systems are fundamental to the appropriate use
and effectiveness of donor assistance since aid is
increasingly provided through modalities that rely
on well-functioning systems for budget
development, execution and control.

• Strong public financial management (PFM) systems are
essential for effective and sustainable economic
management and public service delivery.
• States are effective and accountable when they are
underpinned by good PFM institutions and systems. Good
PFM systems are also indispensable in ensuring that aid is
being used to achieve development goals.

PFM: Why does it matter and how best to improve it?

Public and Private Aspects of the Economy…
• In economics, nonmarket forces are those acting on economic
factors from outside the market system.
• They include organizing and correcting factors that provide
order to market and other societal institutions and
organizations economic, political, social and cultural – so that
they may function efficiently and effectively as well as repair
their failures.

Public Goods and the Need for Government
• A game theoretic motivation for government

• Market failure and potential roles for government
• Constitutional definition of scope and limitations of
government
• State and local governments and their powers

Market Failure and Potential Roles for Government
• Public goods
• Externalities
• Lack of competition
• Imperfect information
• Distribution of income

END


Chapter 01

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 01

Uploaded by

Copyright:

Available Formats

Ethiopian Civil Service University

College of Finance, Management and Development

Advanced Public finance & Taxation

Thursday, November 23, 2023 1

This module intends to provide the students with concepts and

The module describes public financial systems that comprise taxation,

Thursday, November 23, 2023 Dr.Messele Getachew 2

Thursday, November 23, 2023 3

After completion of the module students will be able to:

Thursday, November 23, 2023 Dr.Messele Getachew 4

Thursday, November 23, 2023 Dr.Messele Getachew 5

Thursday, November 23, 2023 Dr.Messele Getachew 7

Thursday, November 23, 2023 Dr.Messele Getachew 8

 Public finance is field of study in economics that is concerned with

Thursday, November 23, 2023 Dr.Messele Getachew 9

Thursday, November 23, 2023 Dr.Messele Getachew 10

Thursday, November 23, 2023 Dr.Messele Getachew 11

Thursday, November 23, 2023 Dr.Messele Getachew 12

Thursday, November 23, 2023 Dr.Messele Getachew 13

• We attempt to explain why government behaves as it does,

Thursday, November 23, 2023 Dr.Messele Getachew 14

“The political problem of mankind is to combine three things:

Thursday, November 23, 2023 Dr.Messele Getachew 16

• Market and non-market allocation of resources

Thursday, November 23, 2023 Dr.Messele Getachew 17

• Institutions have been crafted at all levels of government to

Thursday, November 23, 2023 Dr.Messele Getachew 19

• The third and last duty of the sovereign or commonwealth is that of

Thursday, November 23, 2023 Dr.Messele Getachew 20

Thursday, November 23, 2023 Dr.Messele Getachew 21

• Allocate resources in public sector Involves making

Thursday, November 23, 2023 Dr.Messele Getachew 22

• Given output of economy (measured in GDP or other

Thursday, November 23, 2023 Dr.Messele Getachew 23

Thursday, November 23, 2023 Dr.Messele Getachew 24

• Market and non-market allocation of resources

• Institutional limits on the market allocation of resources

Thursday, November 23, 2023 Dr.Messele Getachew 25

Thursday, November 23, 2023 Dr.Messele Getachew 26

Thursday, November 23, 2023 Dr.Messele Getachew 27

To sum up, non-tax revenue consists of:

Thursday, November 23, 2023 Dr.Messele Getachew 29

Thursday, November 23, 2023 Dr.Messele Getachew 30

Thursday, November 23, 2023 Dr.Messele Getachew 32

• In addition, sound public financial management

Thursday, November 23, 2023 Dr.Messele Getachew 36

Thursday, November 23, 2023 Dr.Messele Getachew 37

Thursday, November 23, 2023 Dr.Messele Getachew 38

Thursday, November 23, 2023 Dr.Messele Getachew 40

• A game theoretic motivation for government

Thursday, November 23, 2023 Dr.Messele Getachew 41

Thursday, November 23, 2023 Dr.Messele Getachew 42

Thursday, November 23, 2023 Dr.Messele Getachew 43

You might also like