Tax Design Chapter 1

Tax design
&
administration in
Ethiopia
Teklu K.
teklukasu@gmail.com
0911431681
Oct. 2021
Work Load
 ECTS……………………………………………6
 Credit hr………………………………………4
 Contact Hr./week….……………………..4
 Contact Hours/Sr..................................60
 Self-Study Hr./sr--------------------------....120
 Total Hours.............................................180
 Contact day…………………………….Every Wednesday
3:30-5:30 PM
"In the world nothing is certain but tax &
Death" Ben. Franklin. Teklu K. 2018
Course Descriptions
 This module is intended to provide students with
 The economic role of government in the economy and
rationale for government intervention (action),
 The basis and effects of government programs,
 The basics of taxation and the alternative means of
financing government expenditure,
 The excess burden of taxation, the alternative
perspectives on the burden of the debt and the choice
between borrowing and taxation to finance a deficit.
 Furthermore, it discusses the new approaches of
accounting (IFRS/IPSAS) and how IFRS/IPSAS influences
tax administration and reporting
"In the world nothing is certain but tax & Death" Ben. Franklin. Teklu K. 2018
Course Objectives
 At the end of this module students will be able to
 Understand the significance of taxation in socioeconomic
development
 Identify the basic principles that need to be considered in tax
design
 Undertake tax administrative functions
 Formulation of efficient and effective tax Administration system
 Design techniques that enhance taxpayer voluntary compliance
 Justify the need for fiscal decentralization and explain the practice
in Ethiopia
 Evaluate tax reforms in Ethiopia
 Examine the new accounting approach (IFRS/IPSAS) relating to tax
 accounting and reporting
Course Contents
Overview of Taxation
 Tax Design proces
 Tax Structure
Tax Administration&Its Functions
Tax Accounting and Tax Auditing
Tax Administration in Ethiopia
Tax Administration Challenges
 Privatization in Tax administration
Tax Reforms of Ethiopia
Chapter 1: Overview of Taxation
Purpose and Principles of Taxation
Tax Type and Rate Structure
Shifting and Incidence of Tax
Features of Tax Design
Conceptual Framework
Tax Design Concepts
Principles of Good Tax Policy
Progressive taxation and tax design
Chapter 2: Tax Design process
Local tax policy design
Tax Design for small businesses
Design of tax incentives
Administrative features of Tax Design
Tax Harmony and Optimal Taxation

Chapter 3: Tax Structure
Ethiopia’s tax structure and International

Practice
Ethiopia’s Tax Laws in force
Chapter 4: Tax Administration
The need for tax administration
Tax administration and Fiscal Federalism
Constitutional Bases of Taxation

Functions
Taxpayer registration
Taxpayer services
Return processing and payment
processing
Collection Enforcement
Chapter 6: Tax Accounting and Tax
Auditing
Revenue Accounting
Audit and Assessment
Delinquency control and compliance

Chapter 7: Tax Administration in
Ethiopia
Types of tax Administration organization
Institutional framework of Revenue bodies
Tax Administration procedures and input

Challenges
The need for automation
Automation in Ethiopian Tax

administration
Chapter 9: Privatization in Tax
administration
The importance of outsourcing
Functions that could be privatized

Chapter 10: Tax Reforms of Ethiopia
Assessment
Individual assignments…………………….20
Group assignments………………………….20
Test………………………………………………….20
Final exam……………………………………….40
Total……………………………………………….100
Group Assignment I(20 pts) SD: Dec,1
1. How tax revenue as a share of GDP has changed
over time in Ethiopia(SDPRP,PASDEP,GTP I& GTP II)
A. National
B. Regional
C. Federal
2. How Ethiopia compares to other countries with
respect to taxation? LIC, MIC,HIC, SSAC,
3. What are most important revenue sources for
national, federal and Regional states in Ethiopia?
Group Assignment II (20 pts) Dec. 1
Tax Design proces in Ethiopia
Tax Administration in Ethiopia
Tax Accounting and Tax Auditing i Ethiopia
Tax Administration Challenges i Ethiopia
 Privatization in Tax administration
Tax Reforms of Ethiopia ad its effectivess

Ch- 1
General Overview of Taxation
Teklu K. (PhD)
0911 431681 teklukasu@gmail.com
Oct,2021
Teklu K.teklukasu@gmail.com
1. Definition and Nature of Taxation
 A tax is “a compulsory charge imposed
by the Government without any
expectation of direct and equivalent return
(quid pro quo) from the government for the
contribution made.
20
Cont….
In a modern state, government is expected to
offer public goods like: Defense, high ways, etc.
These public goods have the characteristics of
none excludable (consumption of such goods by
one person is impossible to exclude others) and
non rival (once a good is provided, the
additional cost of another individual consuming
the good is zero). 21
Cont….
Not only financing of public goods, Taxation
is one of the component of fiscal policy and
it can enable government to stabilize the
economy and adjust the income
distribution.
Taxation should be efficient and contribute
to economic growth.
22
Cont….
Throughout history, people have debated
– the amount and kinds of taxes that a
government should impose, as well as
– how it should distribute the burden of
those taxes across society.
Unpopular taxes have caused public
protests, and even revolutions.
In political campaigns, candidates’ views on
taxation may partly determine their
popularity with voters.
Cont….
 governments compel the payment of taxes:
– to fund 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;
– to accomplish some redistribution role;
 Every man, willingly or unwillingly, pays an amount of
money in the form of tax on the products he uses
basically. Besides, he pays tax on his income, wealth, etc.
2. Taxation and Public Finance
Public finance deals with the income and
expenditure pattern of the Government
The subject matter of the public finance is
classified under five broad categories.
These are:
– Public Expenditure
– Public revenue
– Public debt
– Financial administration
– Economic stabilization
Cont…
Public finance deals with the income and
expenditure pattern of the Government
The subject matter of the public finance is
classified under five broad categories.
These are:
– Public Expenditure
– Public revenue
– Public debt
– Financial administration
– Economic stabilization
3. Objectives of Taxation
General Objectives: In the beginning,
Government imposed taxes for three basic
purposes these are, to cover the cost of
administration, maintaining law and order in the
country, and for defense. But, in modern days,
there have been a lot of changes in the
Government’s expenditure pattern.
Today, the Government is in the position to
restore social justice in the society by way of
providing various social services like education,
employment, pension, public health, housing,
sanitation and the development of weaker
sections of the society. 27
Cont….
1. Raising Revenue
 To render various economic and social
activities government requires large amount
of revenue. To meet this enormous
expenditure, Government imposes various
types of taxes in addition to the non-tax
revenue.
.
28
Cont….
2. Removal of Inequalities in Income &Wealth.
 The welfare state aims at the removal of inequalities in
income and wealth. By framing suitable tax policy, this
end can be achieved.
3. Ensuring Economic Stability
 Taxation affects the general level of consumption and
production. Hence, it can be used as an effective tool for
achieving economic stability. That is, by means of
taxation the effects of trade cycle i.e. inflation and
deflation can be controlled.
 During the period of boom or inflation, the excess
purchasing power in the hands of people leads to rise in
the price level. Raising the existing tax rates or imposing
additional taxes can remove such excess purchasing
power. Then the abnormal demand will be reduced and
the economic stability can be achieved.
29
Cont….
 At the same time, by providing grants, tax exemptions
and concessions, production can be encouraged there by
inflation is controlled.
 during the period of depression or deflation, the role of
tax policy in the economy is important. Reduction in the
existing tax rates and removal of certain taxes,
consumption can be induced which in turn results in
increasing demand. This encourages business activities,
and the economic growth can be achieved.
4. Reduction in Regional Imbalances
By way of announcing various tax exemptions and
concessions to that particular backward regions or
states, the economic activities in those areas can be
induce and accelerated.
30
Cont….
5. Capital Accumulation
 Tax concessions or rebates given for savings or investment
in provident funds, life insurance, unit trusts, housing
banks, post offices banks, investment in shares of certain
companies etc,
 lead to large amount of capital accumulation which is
essential for the promotion of industrial development.
6. Creation of Employment Opportunities
 More employment opportunities can be created by
giving tax concessions or exemptions to small
entrepreneurs and to the industries adopting labor-
intensive techniques. In this way, unemployment
problem can be solved to certain extent.
31
Cont….
7. Preventing Harmful Consumption
 Taxation can be used to prevent harmful
consumption. By way of imposing heavy excise
duties on the commodities like liquors, cigars etc.,
the consumption of such articles is reduced to a
considerable extent.
8. Beneficial Diversion of Resources:
 The imposition of heavy duties on non-essential and
luxury goods discourages the producers of such
goods.
 The resources utilized for the production of these
goods may be diverted into the production on other
essential goods for which various tax concessions
are given. 32
Cont….
9. Encouragement of Exports
 Now –a- days export oriented industries are
encouraged by way of providing various exemptions
like 100% relief from income tax, free trade zones
etc. It results in the large earnings of foreign
exchange.
10. Enhancement of Standard of Living.
 By way of giving various tax concessions to certain
essential goods, the Government enhances the
standard of living of people.
33
4. Characteristics of Taxation
i) Tax is a compulsory contribution: no taxpayer
can refuse the payment on the ground that
he/she doesn’t receive any direct and
immediate benefit.
ii) The taxpayer will be required to pay tax if it is
due form him: Taxes cannot be demanded from
a person if it is not required to be paid. For
example, tax on liquor cannot be collected from
a person who doesn’t drink liquor.
34
Cont…
III) Taxes are levied by government: Nobody else
has the right to do so. By any means necessary
and feasible, the government will claim its right
to collect taxes by the use of law.
IV) Common benefits to all: The expenditure
incurred by government through the collection
of tax is meant for all the people regardless of
who pays tax and who do not.
V) No Direct benefit: When an individual pays
taxes, he cannot expect to receive an
immediate, direct, and equivalent amount of
service from the government in return. 35
Cont….
VI) Certain Taxes are levied for specific objectives:
Government levies tax on certain goods in order
to reduce its consumption by the public too.
For example, Government levies taxes on luxury
goods to reduce its consumption and divert the
resources to production and distribution of
essential goods. also for diversion of resources or
saving foreign exchange. Certain taxes are
imposed to reduce inequalities of income and
wealth.
VII) Attitude of Taxpayers: each tax-payer would
like to be exempted from tax paying, 36
Cont….
VII)Tax system goes in harmony with the
National objectives: It tries to accommodate
the problems of taxpayers. The system should
be flexible with the changing requirements of
the economy.
VIII) Funding public expenditure: Money collected
from taxes will be used for expenditures such as
construction of roads, payment of salaries of
civil servants, financing of public programs and
projects etc.
37
5. Principles of taxation
How should a tax system be designed to raise a
given amount of revenue?
What criteria should be used to evaluate the
advantages and disadvantages of a particular tax
system or tax policy proposal?
There are various criteria (principles) that can be
followed in evaluating a tax policy proposal (tax
structure);
some of them are in conflict against each other;
Some of the criteria such as equity are subjective;
People may disagree on the relative importance of
the criteria;
Cont…
 Adam Smith (1776) calls them canons of a tax system. There are
four canons of taxation as prescribed by Adam Smith (1776).
 Equity
 Economy
 Certainty
 Convenience
 Smith’s canons were later extended by other writers (Bestable
and others) to include:
 Neutrality
 Productivity
 Buoyancy
 Flexibility
 Simplicity etc "In the world nothing is certain but tax &
6. Taxes and Efficiency
One tax system is more efficient than
another if it raises the same amount of
revenue at a smaller cost to taxpayers.
An efficient tax system is one that imposes
small deadweight losses and small
administrative burdens.
7. Cost of Taxes to Taxpayers
The Cost of Taxes to Taxpayers
The tax payment itself
Deadweight losses
Administrative burdens

Cont…
Deadweight loss of a tax
Because taxes distort incentives, they
entail deadweight losses.
The deadweight loss of a tax is the
reduction of the economic well-being of
taxpayers in excess of the amount of
revenue raised by the government.
Cont…
Administrative burdens
Complying with tax laws creates additional
deadweight losses.
Taxpayers lose additional time and money
documenting, computing, and avoiding taxes
over and above the actual taxes they pay.
The administrative burden of any tax system
is part of the inefficiency it creates.
8. Tax rates
Tax Rate
 a percentage rate which is applied on a tax base
to determine the amount of a tax liability
 Marginal tax rate
 a tax rate applied to the last dollar of a taxable
income
 Average tax rate
 a tax rate applied to each dollar of taxable income
 Effective tax rate
 a tax rate applied to each dollar of economic
income
8.Tax Rate
Example
Consider the following hypothetical data
Monthly Income Tax Rate Incremental Amount
0-3,000 -- 3,000
3,000-10,000 10% 7,000
10,000-30,000 20% 20,000
Above 30,000 30% --
Assume a taxpayer’s monthly income is $80,000.

MTR=30% ATR=25.6% ETR=24.6%
Teklu Kassu ECSU 2011 EC
9. Tax rate structure
1. Proportional Tax rate structure: Tax all income equally
2.Progressive (Graduated) Tax Rate Structure
 taxes the higher income groups at higher tax rates & lower
income groups at lower tax rates
(3) Regressive Tax Rate Structure
 taxes the higher income groups at lower tax rates & lower
income groups at higher tax rates
(4) Digressive (Mild) Tax Rate Structure
 similar to progressive tax rate structure but tax rate
increases at a decreasing rate

Tax base and tax rate
Tax Base Proportiona Progressive Regressiv Digressive
l e
0-1000 5% -- 30% --
1000-3000 5% 10% 25% 10%
3000-7000 5% 15% 20% 18%
7000-12000 5% 25% 15% 24%
Over 12000 5% 40% 10% 27%
47
10. lump-sum tax
A lump-sum tax is a tax that is the same
amount for every person, regardless of
earnings or any actions that the person
might take.
lump-sum tax is the most efficient tax:
causes no deadweight loss
Cont…
A does not distort incentives, as a person’s
decisions have no tax consequences
Minimal administrativeburden:no need to hire
accountants, keep track of receipts, etc.
Yet, not used because perceived as unfair:
• in dollar terms, the poor pay as much as the rich
• relative to income, the poor pay much more
than the rich

11.Taxes and Equity
How should the burden of taxes be divided
among the population?
Income
Property
Expense
Saving
Cont…
How do we evaluate whether a tax system
is fair?
Equal Absolute amount
Equal Proportional amount
Progressive Marginal proportional amount

Taxable capacity
Is the ability to pay of a tax payer as measured
by different indicators.
It was is interpreted as the money income of the
tax payer.
 It is the most generally accepted theory.
(superior over cost of service, benefit received,
Socio-Political Approach and Expediency
Approach)
According to this theory each person should
contribute to the income of the state in
proportion to his ability to pay.
Index of Ability to Pay
The theory of ability to pay, however, involves
the fundamental problem, as to how to measure
the ability to pay of a person.
There are two approaches which have so far
been advanced for this purpose-the objective
approach and the subjective approach.
In the objective approach, the faculty theory has
been evolved to measure ability to pay.
In the subjective approach, the sacrifice theory
has been evolved to measure ability to pay.
Faculty theory indices of ability to pay
Property: Property or Accumulated wealth was
considered as the index of ability to pay. It was
considered that property in the form of land,-
buildings, gold, golden ornaments, etc., was a
measure of a man's financial ability.
Income: Income is one of the most accepted
indices of ability to pay. Under this index,
persons with higher incomes share a larger
money burden of tax and lower incomes are
taxed at lower rates. People with equal incomes
are taxed at equal rates.
Size of the Family: While determining the tax
paying ability of a person, the size of the family-
should also be taken into account. A larger size
of the family with a given income may have
smaller tax paying ability than of a smaller size
family, e.g., a bachelor possesses the higher tax
paying ability than a married couple having four
children while other things being the same.
Consumption: Another objective index of ability
to pay is he consumption expenditure of the
members of the society.
Subjective Approach(Sacrifies theory)
The subjective approach is based on the
psychological or mental reactions of the tax
payers.
Each tax-payer should make equal sacrifice, if tax
burden is to be justly distributed.
According to J.S.Mill, "The just distribution of tax
share prevails when all individuals incur equal
sacrifice while contributing to the common good.
Equal sacrifice refers to the sacrifice in terms of
utility of income sacrificed by individuals in
contributing to the common good.
Subjective Approach(Sacrifies theory
Conan Stuart and Edge worth have advanced
three concepts of equal sacrifice, viz.:
Equal Absolute Sacrifice: each taxpayer should make
equal absolute sacrifice, i.e. the total disutility of a
tax should be equal for all tax-payers.
Equal Proportional Sacrifice: each tax payer should
sacrifice the same proportion of total utility or
satisfaction derived from his total income
 Equal Marginal Sacrifice: the tax payers should
pay tax according to their money income, i.e. the
rich should pay the tax at a much higher rate than
poor.
Cont…
Approaches in taxation
Benefits received principle
Ability-to-pay principle
Cost of service approach
Expediency approach

Cont…
The benefits principle
The benefits principle is the idea that
people should pay taxes based on the
benefits they receive from government
services.
An example is a gasoline tax:
Tax revenues from a gasoline tax are
used to finance our highway system.
People who drive the most also pay the
most toward maintaining roads.
Cont…
Ability-to-pay principle
The ability-to-pay principle is the idea that
taxes should be levied on a person according to
how well that person can shoulder the burden.
The ability-to-pay principle leads to two
corollary notions of equity.
Vertical equity
Horizontal equity
Cont…
Ability-to-pay principle
Vertical equity is the idea that taxpayers
with a greater ability to pay taxes should
pay larger amounts.
– For example, people with higher incomes
should pay more than people with lower
incomes. "In the world nothing is certain but tax &
Cont…
Vertical Equity and Alternative Tax Systems
A proportional tax is one for which high-
income and low-income taxpayers pay the
same fraction of income.
A regressive tax is one for which high-
income taxpayers pay a smaller fraction of
their income than do low-income taxpayers.
A progressive tax is one for which high-
income taxpayers pay a larger fraction of
their income than do low-income taxpayers.
Cont…
Horizontal Equity
Horizontal equity is the idea that taxpayers
with similar abilities to pay taxes should
pay the same amounts.
For example, two families with the same
number of dependents and the same
income living in different parts of the
country should pay the same federal taxes.

12. Tax Incidence and Tax Equity
The difficulty in formulating tax policy is
balancing the often conflicting goals of
efficiency and equity.
The study of who bears the burden of taxes is
central to evaluating tax equity.
This study is called tax incidence, ultimate
burden.
Cont…
Flypaper Theory of Tax Incidence
According to the flypaper theory, the

burden of a tax, like a fly on flypaper,
sticks wherever it first lands.

Classification of Taxes
Direct Taxes Vs Indirect Taxes
Ad-valorem Taxes Vs Unit Taxes
Single Tax Vs Multiple Taxes
Domestic Taxes Vs International Taxes
Income Tax, commodity/Expenditure Tax

and Property tax
Direct Taxes Vs Indirect Taxes (Cont….)
Comparison Item Direct Taxes Indirect Taxes
Base of levy are levied on incomes and are levied on goods and
properties services
Equitability equitable or progressive in regressive in nature b/c the
nature b/c they are based on rich and the poor will pay
ability-to-pay principle equal tax on goods
Administrative costs of collecting direct taxes costs of collecting indirect
efficiency to the gov’t are relatively low taxes to the gov’t are
relatively high
Certainty are certain b/c taxpayers know uncertain to the gov’t b/c of
how much, when and on what rise and fall of prices of
basis they pay goods and services
Distortion of have the effect of reducing cause for inflationary forces
economy demand and prices through high prices
Popularity are generally opposed by paid in terms of price of
taxpayers as they are directly goods & taxpayers do not
imposed on the taxpayers feel the extra tax burden
67
Ad-valorem Taxes Vs Unit Taxes (Continued…)
Comparison Ad-valorem Taxes Unit Taxes
Item
1) Base of levy value of items to be taxed any measurement other
than the value of items to
be taxed
2) Convenience difficult to administer and easy to administer and
collect collect
3) Evasion high chance of tax evasion low chance of tax evasion
4) Revenue yield high during inflation period static during and inflation
but low during deflation time deflation time
5) Certainty difficult to predict revenue easy to predict revenue

yield yield
6) Equitability equitable not equitable
68
Classes of Income
 What is Income? Which Income should be
the base for Income Tax?
Accounting income
Economic income (Schanz-Haig-Simons

Model Income)
Statutory income
69
Accounting Income
An income defined by accounting
legislative bodies for financial reporting
purposes
"Income is increases in economic benefits
during the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in
increases in equity, other than those
relating to contributions from equity
participants." (IFRS Framework)
Economic Income (Schanz-Haig-
Simons Model Income)
Is the aggregate of an entity’s consumption and
change in net worth in a given period of time
I = C + ΔNW
Consumption refers to the purchase of goods and
services of any kind
Change in Net worth (Savings) refers to the value of
all assets minus the value of all liabilities
The objective is to measure the economic
capacity of an entity
Statutory Income
Is an income defined by the tax law of a nation/state
for income tax reporting purpose, which is the base
to charge income tax liability
“Income shall mean every sort of economic benefit

including non-recurring gains in cash or in kind, from
whatever source derived and in whatever form paid,
credited or received.”
The objective is to measure the result of a business

operation in accordance with the rules of tax laws to
compute the income tax due of a taxpayer
Global Income TVs Scheduler Income Tax
(i) Global Income Tax
is an income tax which is levied on global
income of a taxpayer
(ii) Scheduler Income Tax
is an income tax which is levied on income
classified as a separate schedule (scheduler
income)
Note:- The Ethiopian government uses
scheduler income tax system
73
Individual Income Tax Vs Corporate Income
Tax
(i) Individual Income Tax/Personal Income Tax
is an income tax levied on the income of an
individual for a given taxable period
income
individual
(ii) Corporate Income Tax/Company Income Tax
 is an income tax levied on the profit of a
corporation/company for a given taxable period
profit
corporation/company
74
Taxes and Efficiency
An efficient tax system is one that imposes
small deadweight losses and small
administrative burdens.
One tax system is more efficient than
another if it raises the same amount of
revenue at a smaller cost to taxpayers.
Cost of Taxes to Taxpayers
The tax payment itself
Deadweight losses
Administrative burdens

Deadweight loss of a tax
loss caused by the imposition of a new tax
results from a new tax that is more than what is
normally paid to the government's taxing
authority.
It is the reduction of the economic well-being
of taxpayers in excess of the amount of
revenue raised by the government.
Administrative burdens
Complying with tax laws creates additional
deadweight losses.
Taxpayers lose additional time and money
documenting, computing, and avoiding taxes
over and above the actual taxes they pay.
The administrative burden of any tax system
is part of the inefficiency it creates.
Global Income Vs Scheduler Income Tax
Global Income Tax: is an income tax which
is levied on global income of a taxpayer
 Scheduler Income Tax:is an income tax
which is levied on income classified as a
separate schedule (scheduler income)
Note:- The Ethiopian government uses
scheduler income tax system 79
Index of Ability to Pay
However ability to pay involves
fundamental problem, as to how to
measure the ability to pay of a person, two
approaches have been advanced for this
purpose
The objective approach (faculty theory )
The subjective approach(sacrifice theory )
Property: Accumulated wealth in the form of
land,-buildings, gold, ornaments, etc., was a
measure of a man's financial ability.
Income:, Persons with higher incomes share a
larger money burden of tax and lower incomes
are taxed at lower rates. People with equal
incomes are taxed at equal rates.
Size of the Family: While determining the tax
paying ability of a person, the size of the family-
should also be taken into account.
A larger size of the family with a given income
may have smaller tax paying ability than of a
smaller size family, e.g., a bachelor possesses the
higher tax paying ability than a married couple
having four children while other things being the
same.
Consumption: Another objective index of ability
to pay is he consumption expenditure of the
members of the society.
Is based on the psychological reactions of the tax
payers.
Each tax-payer should make equal sacrifice, if
tax burden is to be justly distributed.
According to J.S.Mill, "The just distribution of tax
share prevails when all individuals incur equal
sacrifice while contributing to the common
good.
Equal sacrifice refers to the sacrifice in terms of
utility of income sacrificed by individuals in
contributing to the common good.
Conan Stuart and Edge worth have advanced
three concepts of equal sacrifice, :
Equal Absolute Sacrifice: each taxpayer should make
equal absolute sacrifice, i.e. the total disutility of a
tax should be equal for all tax-payers.
Equal Proportional Sacrifice: each tax payer should
sacrifice the same proportion of total utility or
satisfaction derived from his total income
 Equal Marginal Sacrifice: the tax payers should
pay tax according to their money income, i.e. the
rich should pay the tax at a much higher rate
than poor.
Conceptual Framework
The Conceptual Framework is a body of
interrelated objectives and fundamentals.
It provide guidance in selecting transactions,
events and circumstances to be accounted for,
how they should be recognized and measured,
and how they should be summarized and
reported.
CONCEPTUAL FRAMEWORK
FISCAL POLICY
The policy of the government employed to
Mobilize the necessary revenue,
 From whom to raise this revenue,
 Determine the burden of tax on different
groups of the society, and
 Decide how to spend the revenue thus raised
more rationally.
Objectives of fiscal policy
The most common objectives of fiscal
policy of different countries are:
Economic growth
Promotion of Employment
 Stabilization of the economy
Economic justice or equality

Cont…
The emphasis on fiscal policy objectives
vary from country to country and from time
to time.
Stability and equality get higher emphasis
in developed nations while growth,
employment and equality get higher
priority in less developed nations.
Cont…
The most common method of fulfilling the
objectives of fiscal policy is to operate the
two instruments: taxation and public
expenditure.
Capital formation, i.e. increasing the stock
of productive assets, plays a key and
strategic role in economic development:
the higher the rate of capital formation,
the higher the rate of economic growth.
Cont…
Underdeveloped countries are caught in the
‘vicious circle of poverty’ which is expressed as
high propensity to consume
 low propensity to save
 low rate of investment
 low level of income.

Discussion Question
Ethiopia is an old, unique ,poor country known for
its early civilization. It is caught in the ‘vicious circle
of poverty’ which is expressed as
high propensity to consume
 low propensity to save
 low rate of investment
 low level of income.
Q. Do you agree? Discuss why or why not.

Discussion Question
Evaluate Ethiopia tax system In the eyes of
sound tax principles
List taxes In Ethiopia and describe their
costs to tax payers
What is the role of fiscal policy In Ethiopia?
Example
1. How tax revenue as a share of national income
has changed over time in US

Example: U.S. Tax Revenue (% of GDP)
Example: Central Govt Revenue (% of GDP)
France 39%
United Kingdom 34
Germany 29
Brazil 20
United States 19
Canada 18
Russia 17
Pakistan 15
Indonesia 15
Mexico 13
India 10
Example: Receipts of the U.S. Federal Govt, 2004
Amount Amount Percent
Tax
(billions) per person of Receipts
Individual income taxes $ 809 $2,753 43%
Social insurance taxes 733 2,494 39
Corporate income taxes 189 643 10
Other 149 507 8
Total $1,880 $6,397 100%

Example: Receipts of State & Local Govts, 2002
Amount Amount Percent
Tax
(billions) per person of Receipts
Sales taxes $ 324 $1,102 19%
Property taxes 279 949 17
Individual income taxes 203 690 12
Corporate income taxes 28 95 2
From federal govt 361 1,228 21
Other 490 1,667 29
Total $1,685 $5,733 100%

Summary
Equity and efficiency are the two most
important goals of the tax system.
The efficiency of a tax system refers to the
costs it imposes on the taxpayers.
The equity of a tax system concerns whether
the tax burden is distributed fairly among the
population. "In the world nothing is certain but tax & Death" Ben. Franklin. Teklu K. 2018
Summary
According to the benefits principle, it is fair
for people to pay taxes based on the
benefits they receive from the government.
According to the ability-to-pay principle, it
is fair for people to pay taxes on their
capability to handle the financial burden.
Summary
The distribution of tax burdens is not the
same as the distribution of tax bills.
Much of the debate over tax policy arises
because people give different weights to
the two goals of efficiency and equity.


Tax Design Chapter 1

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Tax Design Chapter 1

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Tax design

Tax Design for small businesses

Design of tax incentives

Administrative features of Tax Design

Tax Harmony and Optimal Taxation

Ethiopia’s tax structure and International

The need for tax administration

Tax administration and Fiscal Federalism

Constitutional Bases of Taxation

Audit and Assessment

Delinquency control and compliance

Types of tax Administration organization

Institutional framework of Revenue bodies

Tax Administration procedures and input

Automation in Ethiopian Tax

Functions that could be privatized

Tax Administration in Ethiopia

Tax Accounting and Tax Auditing i Ethiopia

Tax Administration Challenges i Ethiopia

 Privatization in Tax administration

Tax Reforms of Ethiopia ad its effectivess

The tax payment itself

"In the world nothing is certain but tax &

Assume a taxpayer’s monthly income is $80,000.

"In the world nothing is certain but tax &

1000-3000 5% 10% 25% 10%

3000-7000 5% 15% 20% 18%

7000-12000 5% 25% 15% 24%

Over 12000 5% 40% 10% 27%

"In the world nothing is certain but tax &

Equal Proportional amount

Progressive Marginal proportional amount

"In the world nothing is certain but tax &

Cost of service approach

"In the world nothing is certain but tax &

"In the world nothing is certain but tax &

According to the flypaper theory, the

"In the world nothing is certain but tax &

Ad-valorem Taxes Vs Unit Taxes

Single Tax Vs Multiple Taxes

Domestic Taxes Vs International Taxes

Income Tax, commodity/Expenditure Tax

5) Certainty difficult to predict revenue easy to predict revenue

Economic income (Schanz-Haig-Simons

“Income shall mean every sort of economic benefit

The objective is to measure the result of a business

"In the world nothing is certain but tax &

 Stabilization of the economy

Economic justice or equality

 low propensity to save

 low rate of investment

 low level of income.

Q. Do you agree? Discuss why or why not.

"In the world nothing is certain but tax &

Individual income taxes $ 809 $2,753 43%

Social insurance taxes 733 2,494 39

Corporate income taxes 189 643 10

Other 149 507 8

Total $1,880 $6,397 100%

Property taxes 279 949 17

Individual income taxes 203 690 12

Corporate income taxes 28 95 2

From federal govt 361 1,228 21