Rev Gen Chapter Two

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Chapter TwoTaxation: The Source of Public RevenueAfter 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

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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 todays Iraq, the

inhabitants accepted the need to pay tax to

finance a great war. 2


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Overview However, even when the war was over, the

taxmen did not want to give up their privilegeof collecting taxes.

In Ancient civilizations ofPalestine, Egypt,

and Babylonia, rulers earned income in theform of food from their land, and metals from

their mines.

They taxed farmers by requiring them to givesome proportion of crops to the state.

People were also forced to work for the

rulers because the kings were the sole owner

of everything. 3


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Overview Poll taxes were a major source of revenue in

Egypt during 323 BC- 30 BC.

The government of ancient Athens (Greece)

relied on publicly owned silver mines, tribute

from conquered countries, a few customs

duties and voluntary contributions from

citizens for revenue.

Romans used to pay poll taxes in earlier

days, but govt exempted citizen from this

tax in the 2nd century. More than 100 years

later, Emperor Augustus introduced land and

inheritance tax. 4


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Overview

During the Middle Ages (5th to 15th century AD),

Europeans were subject to many forms of

taxation such as land tax, poll tax, inheritance

tax, and toll tax (payment for the use of roads,

bridges etc). Roman Catholic Church also collected tithe,

fees, fines, and tolls.

These urban centers collected revenues usingtaxes on property as well as sales tax from

certain items.

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Overview

During 16th and 17th centuries European states

relied heavily on the revenue generated fromthe Kings own states and from tax on land.

The power of Parliament grew steadily and in

1689 the English Bill of Rights guaranteed thatthe king could not tax without parliaments

consent.

By18th century England started imposingvarious taxes on transactions. Taxes on

imported goods assumed greater importance.

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Overview In the late 19th and 20th centuries, concerns

about both fairness and ability of tax systems togenerate tax revenue led governments to enact

income tax.

The first progressive income tax was firstintroduced in Prussia in 1853.

Other countries like Britain, United States, and

France introduced progressive income tax in

1906, 1913, and 1917 respectively.

Although income taxes generated little revenue

at first, they play a major role in all modern tax

s stem toda .7


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2.2. Meaning and definition of tax

A tax is a compulsory charge imposed bythe Government without any expectation of

direct return or benefit to the tax-payer.

This implies that there is no quid pro quorelationship between the government and the tax

payer.

Taxes can also be defined as paymentsextracted by government from people and

organizations to fund public expenditure, without

rendering proportionate benefit, by the use of

law 8


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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 additionalcost of another individual consuming the good is

zero).

There is no price mechanism to protect nonexcludability & none rival in consumption goods,

as a result, Private sectors cannot supply it.

Therefore, government is forced to levy taxes to

finance these and other necessar ex enditures.9


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Cont.

The act of laying a tax or of imposing taxes, as

on the subjects of a state, by government, or onthe members of a corporation or company, by

the proper authority is known as taxation.

Not only financing of public goods, Taxation isone of the component of fiscal policy and it can

enable government to stabilize the economy and

adjust the income distribution.

We also argued that taxation should be efficient

and contribute to economic growth.

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Cont.

It constitutes an involuntary saving by

taxpayers which is diverted to government

for use in resource allocation.

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2.3 Characteristics andObjective of Taxation

Characteristics of Taxation

i) Tax is a compulsory contribution: no

taxpayer can refuse the payment on the ground

that he/she doesnt 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 doesnt drink liquor. 12


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Characteristics of TaxationIII) Taxes are levied by government: Nobody

else has the right to do so. By any meansnecessary and feasible, the government will

claim its right to collect taxes by the use of law.

IV) Common benefits to all: The expenditureincurred 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. 13


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Cont.

VI) Certain Taxes are levied for specific

objectives: Government levies tax on certaingoods 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.

VII) Attitude of Taxpayers:

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Cont.

VII)Tax system goes in harmony with the

National objectives: It tries to accommodatethe 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 ofpublic programs and projects etc.

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Objectives of Taxation: Revenue generation, however, is not the only

objective of taxation, though it is clearly theprime objective.

The specific purposes of levying taxes may be

summarized as follows:

Supporting the operations of government

Influencing the macro economic performance ofthe economy. Governments achieve this through

its fiscal policy.

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Cont. Carrying out the functions of the government

such as national defense and providinggovernment services.

Redistributing resources between individuals or

sections in the population.

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Cont. General Objectives: In the beginning,

Government imposed taxes for three basicpurposes 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 theGovernments expenditure pattern.

Today, the Government is in the position to

restore social justice in the society by way ofproviding various social services like education,

employment, pension, public health, housing,

sanitation and the development of weaker

sections of the society. 18


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Cont. Non-tax revenues are not sufficient to meet the

entire expenditures. Hence, Governmentimposes taxes of various types.

The general objectives of taxes include:

1. Raising Revenue

2. Removal of Inequalities in Income &Wealth.

3. To change peoples behavior.

4. To reduce private consumption

5. To promote Economic growth and stability19


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Cont.6. Reduction in Regional Imbalances

7. Capital Accumulations

8. Beneficial Diversion of Resources.

9. Creation of Employment Opportunities

10. Encouragement of Exports

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Rev Gen Chapter Two

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