sessions 02 introduction tax

8/2/2019 Sessions 02 Introduction Tax

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Course No. 4135:

KeyWords/Outline

Taxation

Taxation: An Introduction(Tax)


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Issues to be discussed:

Definition of Tax

Characteristics of Tax

Objectives of Taxation Principles of Taxation

Characteristics of a Good Tax

Elements of a Tax Role of Taxation in Economic

Development


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Definition of Tax

Tax is derived from French word taxewhich also means tax.Etymologically Latin word taxare is related to tax, which means tocharge, i.e., to demand or exact as a price etc.

Tax is a contribution exacted by the state.Chambers English Dictionary

Taxes are what we pay for a civilized society.

Justice OliverWendell Holmes, Jr. (mentioned in the verdict of Compania de

Tabacos v. Collectorcase in 1927)

Taxes, after all, are the due that we pay for the privileges of

membership in an organized society.US President Franklin D.Roosevelt (1936).

a tax is the quota each citizen has to pay towards the cost of

public services. in the opinions of Adam Smith, Jean Baptiste Say,and David Richardo.

The term taxes is confined to compulsory, unrequited payments to

general government.OECD (1988).


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Definition of Tax

A tax is purely and simply a contribution, whether direct or

masked, which the public authorities impose upon inhabitantsor goods for the purpose of defraying government expenditure.

Paul Leroy-Beaulieu (1906).

a tax is a compulsory contribution imposed by a publicauthority, irrespective of the exact amount of service renderedto the tax payer in return, and not imposed as a penalty for anylegal offence.Hugh Dalton (1971).

A tax can be defined meaningfully as any nonpenal yet

compulsory transfer of resources from the private to the publicsector, levied on the basis of predetermined criteria and withoutreference to specific benefit received, in order to accomplishsome of nations economic and social objectives. Ray M.

Sommerfeld, H. M. Anderson and H. R. Brock (1980).


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Characteristics of Tax

Nonpenal Compulsory levy Sources of public revenue Direct unrequited Representation:No tax shall be levied or collected except by or under

the authority of an Act of Parliament (Article 83 of the Constitution). Transfer of resources from the private to the public sector Predetermined criteria:A tax can be distinguished from an outright

confiscation of resources because a tax is levied on the basis ofpredetermined criteria and on a recurring basis. Predetermined criteriahopefully make a tax more equitable than confiscation, but this depends onthe governmental body determining the criteria. In the free-world democratic

countries, taxes must generally have a socially acceptable result. Instrument for achieving special objectives:through influencing the

reallocation of resourcesnecessary to achieve a nations economic andsocial objectives e.g., investment decision towards to particular sectorenhancement of the price level for demerit goods to discourage their

production or consumptioncurbing or maintaining price levels, etc.


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Elements of a Tax

1. Compulsory contribution2. Imposed by a government only3. Involvement of the element of sacrifice

4. Welfare of the community as a whole isthe aim

5. Benefit is not the condition of tax payment6. Tax not imposed to realize the cost of

benefit from the taxpayer7. Tax is actually paid out of income8. Tax is actually paid by individuals

9. Legal collection


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Various Terms Related to Tax

Duty:Tax on commodity, i.e., goods and services (e.g., excise duty).Toll: Tax given for using property of other person (e.g., toll on use of road or any bridge).Cess: Tax in relation to any goods for specific purpose (e.g., cess on sugarcane inIndia).

Tariff: Tax or duty on goods imported and exported.

Rate: Tax imposed by a local authority.Assessment: refers to tax and something in addition to taxusually, any taxagainst which there is a direct return (e.g., National Insurance Contribution in the UK).

Imposition: Tax or duty imposed according to legislative provisions orany Act passed by the Legislative Assembly.Levy: Any tax, assessment, or feeimposed or collected. But fee is not a tax.

The term levy may be used for both imposition and tax-determination.Charge: The price taken for providing any goods and services. In case of purepublic goods, it is difficult to take price, but their cost is borne by collecting taxand hence, tax is a charge.

Impost: Tax given for entry into a country.Octroi:Tax given for entry into a city or municipal area.

Sur-tax/Surcharge: Additional tax given on the basis of usual tax.


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Objectives of Taxation

Taxation is linked with the government economic activities.

Three major types of economic activities of the government[Musgrave and Musgrave (1989)]:1) To remove the inefficiencies in allocation of economic resources

under the market system;2) To redistribute the income and wealth for the purpose of equitabledistribution as per social consideration; and

3) To remove the cyclical fluctuations and ensure high level ofemployment and price-stability.

According to Margaret Wilkinson (1992), in case of the first of the abovethree, taxation has its most important role.

The allocation of resources to satisfy consumer wants is theprincipal objective of taxation.


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The market is very good in directing production in line with whatpeople want.

When this happens welfare is maximized and we say that the

outcome is optimal, or efficient. But there are instances where market fails.

There are some goods and services for which there is demand butwhich the market is unable to provide, and there are others which areunder- or over-provided.

Margaret Wilkinson refers to this situation as market failure, wherethe market system -

Market System & Market Failures

fails entirely to provide some goods (e.g., pure public goods), or underprovides (e.g., external benefits, or outputs supplied by

monopolists) or

overprovides (e.g., external costs).


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THE CAUSES OF MARKET FAILURE

(1) (2) (3) (4)

Consumption:non-rival

and/or exclusion

not feasible

PositiveExternality

NegativeExternality

Monopoly

Market failsentirelyno output

PublicGoods

Tax providesgovt. with

resources tosupply these

goods

Market cannottake account

external benefit& under-provides

Mixed goods whichbenefit both

consumers & others

Either subsidies, negative taxes,to reduce price & raise output tothe social optimum; or taxationprovides resources for public

provision of optimal quantity

T H E R O L E O F T A X A T I O N

Taxation to raiseprice and reducesales and output (andexternal costs) to the

social optimum (orlegal controls)

Market under-provides: output

restricted toraise price

and producemonopoly

profits

Regulation rather thantaxation enables the publicsector to control monopolyprice and output decisions;

taxation can be used toredistribute monopoly profits

Market cannot takeAccount externalcost & over-provides

Goods whoseproduction/consumption

imposes cost on others

Market Failure & Role of Taxation


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Objective of taxation can be enumerated as follows:

Achievement of government social objectives:such as provision of merit goods(e.g., health care, education, etc.), endowment allowances for the poor and destitute,etc., mainly through financing those expenditures.Achievement of government economic objectives:such as expanded

industrialization, more economic growth, price-stability, employment generation, etc.through influencing savings, investments, price level & motivation to work more.Discouragement of some consumptions:through imposition of indirect taxation toraise the prices of demerit goods (tobacco/alcoholic products), to discourage theirconsumption.Financing the public expenditures:the most important sources of public revenuefor financing govt. expenditure (supplying public goods in case of market failure,providing subsidies to supply merit goods at lower cost for social reasons).Redistribution of income and wealth:to ensure social justice and equity, taxationthrough various ways (such as progressive direct tax rates, rate differentiation,exemption, zero-rating, or other discriminatory treatment in case of indirect taxes)Increase in economic efficiency:taxes should be imposed and collected by thegovernment in such a way, excess burden of a tax (or distortions) should be kept

minimum, so that economic efficiency can be enhanced.


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Principles of Taxation

Principles of taxation suggested by Adam Smith (1776):

Equity: Canon of equity states that the subjects of every State ought tocontribute towards the support of the government, as nearly as possible, inproportion of their respective abilities, that is, in proportion to the revenuewhich they respectively enjoy under the protection of the State.Here, in

proportion of their respective abilities refers to that the feeling of tax burdenshould be equal to every taxpayer.

Certainty: This canon states that the tax, which each individual is bound topay, ought to be certain and not arbitrary. The time of payment, the manner ofpayment, the quantity to be paid, ought all to be clear and plain to thecontributor, and to every other person.

Convenience:Every tax ought to be so levied at the time or in the manner inwhich it is most likely to be convenient for the contributor to pay it. Thus, themode and timing of tax payment should be convenient to taxpayer.

Economy: This canon states that every tax ought to be contrived as both totake out and keep out of the pockets of the people as the little as possible overand above what it brings into the public treasury of the State. That is, the costof collecting tax should be minimum.


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Slide 1-13Principles of TaxationComprehensive List of Principles of Taxation:

A. Financial Principles:Related to requirement of government revenue.01. Principle of Adequacy [adequate revenue]02. Principle of Flexibility[with respect to coverage and rates of tax to reconstruct the tax-structure]

B.Economic Principles:Related to reaction on the national economy due to imposition of anytax.

03. Principle of Choosing Correct Sources of Taxation[not to tax income generating capital]04. Principle of Diversity [multiple types of taxes and rates of taxes]

C.Principles of Justice:05. Principle of Universality [everybody should pay tax]06. Principle of Equity

D.Principles of Tax Administration:

07. Principle of Determinancy/Certainty08. Principle of Convenience09. Principle of Economy10. Principle of Buoyancy [automatic increase in tax with the increase in GDP without

changing the tax rate or/and tax base]11. Principle of Simplicity [simple to understand and administer]

12. Principle of Consistency [consistent with national macroeconomic policy]13. Principle of Productivity [productivity of revenue].


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Characteristics of a Good Tax

(1) Equity(2) Efficiency (effort to reduce extra tax burden)(3) Certainty

(4) Simplicity and Evidence (simple enough for taxpayers to understand andshould be evident whether taxes represent the costs of public goods andwelfare benefits)

(5) Economy(6) Flexibility and Stability (flexibility to alter tax rates and the size and

composition of tax revenues for stabilizing the economy or to fit an incominggovernments philosophy and to fulfill their promises; stability enables

individuals and companies to plan for tax ahead)(7) Expenditure Restraint (to reduce Tk. 1 private expenditure due to Tk. 1 tax,

so that public spending can be undertaken without inflationary pressure)(8) Convenience

(9) Motivation (for effort to work more, savings, investment, entrepreneurship)(10) Consistency

(11) Productivity

(12) Macro Economic Consideration

(13) International Effects


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Role of Taxation in Economic Development

In the light of the purposes of taxation (achievement of governmentsocial and economic objectives; discouragement/encouragement ofsome consumptions; financing the public expenditures;redistribution of income and wealth; increase in economic

efficiency), following roles of taxation can be identified with respectto economic development:

Financing public projects Ensuring price stability Generation of employment Encourage private sector industrialization Encourage export and discourage imports to make the

country self-dependent Encourage savings and investment

Encourage foreign exchange remittance


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End of the Presentation

Thank you.

sessions 02 introduction tax

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