Classwork Series and Exercises {Economics – SS2}: Taxation

Economics, SS2, Week 5

Topic: Taxation

Contents:

1. Meaning of taxation
2. Features/ characteristics
3. Principles of a good tax system
4. Reasons Government impose tax
5. Problems associated with tax collection

Meaning of taxation

Taxation can be defined as the means by which government finance their expenditure by imposing charges or citizens and corporate entities

Taxation is also defined as the act or method of imposing a compulsory levy by the government or its agency on individuals and firms or on goods and services.

A tax is an involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government activities.

Tax is the compulsory levy imposed by the government or its agency on individuals and firms or goods and services

Governments use taxation to encourage or discourage certain economic decisions. For example, reduction in taxable personal (or household) income by the amount paid as interest on home mortgage loans result in greater construction activity, and generates more.

Features/ characteristics of Tax

The following are the features/ characteristics or attribute of tax

1. Tax payment has age limit; this means that a person must attain a certain age before he/ she starts to pay tax.
2. It is a compulsory levy that must be paid by an individual or corporate bodies
3. It is levied by the government or agencies
4. It is payment made as sacrifices
5. Tax payment is made for the general welfare of the public
6. Tax is made for the growth and development of the country

Principles of a good tax system

Adam Smith gave the following as the principles of a good tax system

1. Principle of certainty: This principle states that the tax should be certain and clear to everybody concerned; the amount to be paid and the manner of payment should also be clear and plain to the tax payer.
2. Principle of equity: This principle states that tax should be paid based on your abilities, it should be paid without causing undue hardship to the payers.
3. Principle of neutrality: this principle says that a good tax system should not in any way interfere unnecessarily with the supply and demand for goods and service. It studies the effect people’s ability to save, produce and their willingness to work.
4. Adequacy: taxes should be just-enough to generate revenue required for provision of essential public services
5. Broad Basing: taxes should be spread over as wide as possible section of the population, or sectors of economy to minimize the individual tax burden
6. Compatibility taxes should be coordinated to ensure tax neutrality and overall objectives of good governance
7. Convenience: taxes should be enforced in a manner that facilitates a way  to the maximum extent possible.
8. Earmarking: tax revenue from a specific source should be dedicated to a specific purpose only when there is a direct cost-and-benefit link between the tax source and the expenditure, such as use of motor fuel tax for road maintenance
9. Efficiency: tax collection efforts should not cost an inordinately high percentage of tax revenues
10. Neutrality: taxes should not favor any one group or sector over another, and should not be designed to interfere-with or influence individual decisions-making.
11. Predictability: collection of taxes should reinforce their inevitability and regularity.
12. Restricted exemptions: tax exemptions must only be for specific purposes (such as to encourage investment) and for a limited
13. Simplicity: tax assessment and determination should be easy to understand by an average taxpayer

Reasons government impose tax

Some of the reasons government impose tax are as follows

1. To redistribute income: the government uses tax to redistribute tax through the Pay As You Earn (P.A.Y.E) method, this method help the government to narrow the gap between the rich and the poor by introducing progressive taxation.
2. It is used to correct the adverse balance of payment: Taxes are used to correct the adverse balance of payment. Importation of foreign goods can be reduced through the use of heavy tax import duties.
3. To protect infant industries: Government can help to protect new industries from competition with the foreign companies
4. Promotion of Economic growth: Taxes can be used to promote economic growth. Government can reduce taxes on company profits so that these profits are diverted back into the business for expansion.
5. Employment purpose: Government can also manipulate taxation to achieve desired employment level. Also the money paid by the tax payers can be used to create more jobs for the unemployed.
6. Direction of production and investment: Taxation can be used to direct production and investment.
7. To control inflation: Taxes can be used as anti-inflationary devices; this can be possible if the government increases direct tax without increasing her expenditure.

Problems associated with the tax collection

Some of the problems encountered by the tax collectors are :

1. Failure of the tax payers to declare real income
2. Failure to meet people’s expectation
3. Lack of book account
4. Mismanagement of government fund
5. Wrong belief of the people
6. Tax evasion i.e. high taxes scare people away and people avoid paying tax.
7. Insincerity of the tax collectors.

Test and Exercise

1. The act or method of imposing a compulsory levy on individual and firms or goods and services is (a) tax (b) taxation (c) incidence of taxation (d) all of the above.
2. All of the following are part of the principle of taxation except (a) equity (b) convenience (c) partiality (d) certainty.
3. One of the reasons why government impose tax is (a) To embezzle it (b) to use the money for their personal building (c) to create employment (d) to travel to other countries.
4. The problems faced by the tax collectors are all of the following except (a) wrong belief of the people (b) insincerity of the tax collectors (d) people easily declare their real income.
5. Tax evasion means (a) means by which people avoid to pay tax (b) means by which people pay their tax easily (c) means by which people are forced to pay their tax (d) none of the above.

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