Taxation part 1

Introduction

Taxation may be 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.

Tax, on the other hand, is defined as a compulsory levy imposed by the government or its agency on individuals and firms or goods and services.


Features or Characteristics of Tax
1. It is a compulsory levy that must be paid by individuals or corporate bodies.
2. It is levied by the government or its agencies.
3. It is a payment made as a sacrifice.
4. Tax is meant for the general welfare of everybody.
5. Tax payment has age limit, that is, people must attain certain age level before they can pay tax.

Principles of A Good Tax

Adam Smith in his book Wealth of Nation has laid down certain rules of a good tax system which he called canons of a good tax system. These principles include:

1. Equity or ability to pay: People should be made to pay tax according to their abilities. This implies that tax revenue should be raised without causing undue hardship to the tax payer.

2. Economy: The principle states that the cost of tax collection should be cheap relative to the revenue yield.

3. Convenience: A tax should be convenient as to form, place and time of payment. For example, an import duty should be duly paid as the imported goods arrive the country.

4. Certainty: The tax should be certain and clear to everybody concerned. The time of payment, the manner of payment and the amount paid should be clear and plain to the tax payers.

5. Revenue yield: From the standpoint of government, the total revenue that a tax yields is of considerable importance. Government are comfortable with taxes that provide a fairly predictable and steady income.

6. Neutrality: An important consideration in evaluating tax is how the tax affects production, savings and people's willingness to work. A good tax system should not interfere unnecessarily with the supply and demand of goods and services.

7. Flexibility: The tax system should be flexible enough for adjustments when the need arises.

8. Simplicity: A good tax system must not be difficult to administer and understand. It should not cause problems of differences in interpretation.

Reasons Why Government Imposes Taxes

There are many reasons why government or its agencies impose taxes on individuals or corporate bodies. Tax is known to be used to improve the economy of a country. The reasons for the imposition of tax include:
1. To raise revenue: Taxes are used to raise revenue for the government. Through this, money required for the provision of essential services, general administrative purposes and financing of capital projects are maid available.

2. To redistribute income: Through the Pay As You Earn (P.A.Y.E) system, government can narrow the gap between the rich and the poor by introducing progressive taxation.

3. To control inflation: Taxes can be used as anti-inflationary device. Government can do this by increasing the direct tax without increasing its expenditures.

4. To protect infant industries: Taxes can be used to protect newly established industries from competition from foreign firms.

5. Prevention of dumping: Taxes are used to prevent dumping by the imposition of high import duties on foreign made goods. Dumping is a condition in which goods are sold abroad at a cheaper prices than are sold in the country in which they are produced. Dumping ruins local industries easily.

6. Savings: Taxation can be used to encourage savings and investments,

7. Employment purposes: Government can manipulate taxation to achieve the desired employment level.

8. Retaliatory measure: Taxation can be used as a retaliatory measure in international trade.

9. Promotion of economic growth.

10. Direction of production and investment: Taxation can be used to direct production and investment, e.g. tax exemptions or rebates for industries located in rural areas.

Economic Effects Of Taxation
1. Effect on production: Production will be affected or reduced if excise duties are high and vice versa.

2. Effect on inflation: An increase in indirect taxes by government can lead to increase in the volume of money in circulation thereby leading to inflation.

3. Effect on consumption: Consumption of some harmful goods can be reduced if government imposes heavy tax on such harmful goods.

4. Effect on investment: High excise duties, company tax, etc. on investors by government will discourage investors from investing in businesses.

5. Effect on prices of goods and services: When government imposes high excise duty, this will make cost of production to be very high which could lead to high prices of goods produced.

6. Effects on salaries of workers: Income tax tends to reduce the disposable income of workers.

7. Effect on demand and supply: High indirect taxes will make demand and supply to be low as few goods will be produced because prices are very high.

8. Effect on savings: High level of taxation on individuals or corporate bodies can lead to reduction in savings.

Read the part 2 here...