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Taxation: The Source of Public Revenue
After completing this chapter you are expected to: Discuss the overview of taxation Discuss the meaning of tax Explain the objectives of taxation Understand the characteristics of taxation
2.1 Overview of taxation
Taxation is a system of raising money to finance(soldiers and police, build dams &roads, to operate schools and hospitals, and for hundreds of other purposes) of government Taxes are as old as civilization. There has never been a civilization that has not collected taxes. The first civilization that we know that started in Sumeria, in today¶s Iraq, the inhabitants accepted the need to pay tax to 2 finance a great war.
. and Babylonia. They taxed farmers by requiring them to give some proportion of crops to the state. In Ancient civilizations of Palestine. rulers earned income in the form of food from their land. and metals from their mines. People were also forced to work for the rulers because the kings were the sole owner 3 of everything.Overview« However. the taxmen did not want to give up their privilege of collecting taxes. Egypt. even when the war was over.
Romans used to pay poll taxes in earlier days.Overview« Poll taxes were a major source of revenue in Egypt during 323 BC. More than 100 years later. Emperor Augustus introduced land and inheritance tax. a few customs duties and voluntary contributions from citizens for revenue.30 BC. but gov¶t exempted citizen from this tax in the 2nd century. 4 . tribute from conquered countries. The government of ancient Athens (Greece) relied on publicly owned silver mines.
bridges etc). and tolls. Europeans were subject to many forms of taxation such as land tax.Overview« During the Middle Ages (5th to 15th century AD). fees. Roman Catholic Church also collected tithe. These urban centers collected revenues using taxes on property as well as sales tax from certain items. 5 . fines. poll tax. inheritance tax. and toll tax (payment for the use of roads.
6 . By18th century England started imposing various taxes on transactions. Taxes on imported goods assumed greater importance. The power of Parliament grew steadily and in 1689 the English Bill of Rights guaranteed that the king could not tax without parliament¶s consent.Overview« During 16th and 17th centuries European states relied heavily on the revenue generated from the King¶s own states and from tax on land.
The first progressive income tax was first introduced in Prussia in 1853. they play a major role in all modern tax 7 system today. 1913. and 1917 respectively. and France introduced progressive income tax in 1906. concerns about both fairness and ability of tax systems to generate tax revenue led governments to enact income tax. Although income taxes generated little revenue at first.Overview« In the late 19th and 20th centuries. . United States. Other countries like Britain.
by the use of 8 law´ .2. Meaning and definition of tax A tax is ³a compulsory charge imposed by the Government without any expectation of direct return or benefit to the tax-payer. Taxes can also be defined as ³payments extracted by government from people and organizations to fund public expenditure.³ This implies that there is no quid pro quo relationship between the government and the tax payer. without rendering proportionate benefit.2.
high ways. In a modern state. 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). government is forced to levy taxes to9 finance these and other necessary expenditures. Cont«. government is expected to offer public goods like: Defense. Therefore. as a result. etc. Private sectors cannot supply it. . There is no price mechanism to protect non excludability & none rival in consumption goods.
Cont«. by the proper authority is known as taxation. as on the subjects of a state. We also argued that taxation should be efficient and contribute to economic growth. 10 . The act of laying a tax or of imposing taxes. or on the members of a corporation or company. Taxation is one of the component of fiscal policy and it can enable government to stabilize the economy and adjust the income distribution. by government. Not only financing of public goods.
Cont«. 11 . It constitutes an involuntary saving by taxpayers which is diverted to government for use in resource allocation.
12 . 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. tax on liquor cannot be collected from a person who doesn¶t drink liquor.2. For example.3 Characteristics and Objective of Taxation 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.
13 .Characteristics of Taxation III) Taxes are levied by government: Nobody else has the right to do so. By any means necessary and feasible. he cannot expect to receive an immediate. direct. 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. and equivalent amount of service from the government in return. the government will claim its right to collect taxes by the use of law. V) No Direct benefit: When an individual pays taxes.
Cont«. Government levies taxes on luxury goods to reduce its consumption and divert the resources to production and distribution of essential goods. VI) Certain Taxes are levied for specific objectives: Government levies tax on certain goods in order to reduce its consumption by the public too. VII) Attitude of Taxpayers: 14 . For example.
The system should be flexible with the changing requirements of the economy. VII)Tax system goes in harmony with the National objectives: It tries to accommodate the problems of taxpayers. financing of public programs and projects etc. payment of salaries of civil servants. 15 .Cont«. VIII) Funding public expenditure:Money collected from taxes will be used for expenditures such as construction of roads.
is not the only objective of taxation. The specific purposes of levying taxes may be summarized as follows: Supporting the operations of government Influencing the macro economic performance of the economy. though it is clearly the prime objective. 16 . Governments achieve this through its fiscal policy.Objectives of Taxation: Revenue generation. however.
Carrying out the functions of the government such as national defense and providing government services.Cont«. 17 . Redistributing resources between individuals or sections in the population.
Cont«. employment. pension. General Objectives: In the beginning. Today. in modern days. Government imposed taxes for three basic purposes these are. public health. the Government is in the position to restore social justice in the society by way of providing various social services like education. . maintaining law and order in the country. housing. But. sanitation and the development of weaker 18 sections of the society. there have been a lot of changes in the Government¶s expenditure pattern. and for defense. to cover the cost of administration.
Cont«. 4. Raising Revenue 2. Removal of Inequalities in Income &Wealth. The general objectives of taxes include: 1. To promote Economic growth and stability 19 . 3. To change people¶s behavior. To reduce private consumption 5. Government imposes taxes of various types. Hence. Non-tax revenues are not sufficient to meet the entire expenditures.
Cont«. 9. Beneficial Diversion of Resources. 6. Encouragement of Exports 20 . Creation of Employment Opportunities 10. Reduction in Regional Imbalances 7. Capital Accumulations 8.
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