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Transcript of Chapter 12:Taxation
the act of levying a tax that is the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of the government
Inherent power of the state to demand enforced contributions from the people for public purposes Taxes are the lifeblood of government. Without taxes, the government will not be able to provide its services to the people Taxes are used by the government:
To raise revenue for the government to cover its own expenditure on the provisions of social services
Instrument of fiscal policy in regulating the level of total spending in the economy so as to stabilize the economy
To alter the distribution of income and wealth
To control the volume of imports into the country A. Direct Taxes
Taxes levied by government on the income and wealth received by households and businesses in order to raise government revenue and as an instrument of fiscal policy
Individual taxes – taxes levied on households
Corporate income taxes – taxes from the government
Types of Taxes 1. Adequacy – taxes should be just enough to generate revenue required for provision of essential public services
2. Broad Basing – taxes should be spread over as wide as possible to all sectors of the population or economy so as to minimize the individual tax burden
3. Compatibility – taxes should be coordinated to ensure tax neutrality and overall objectives of good governance
4. Convenience – taxes should be enforced in a manner that that facilitates voluntary compliance to the maximum extent as possible
Basic Principles of Taxation 1. Ability to pay – states that taxation should be levied according to an individual’s pay
2. Benefit Approach – proposes that taxation should be levied broadly in relation to the benefits that people receive in public services
3. Tax Incident Approach – proposes that the major duty of a tax system is to analyze the effect of a particular tax on the distribution of a tax welfare
Approaches to Taxation end of chapter 12... Tax welfare
refers to the ultimate payers of a tax B. Indirect Taxes
Taxes levied by government on goods and services in order to raise revenue and as an instrument of fiscal policy
Taxes on goods and services include the Value Added Tax (VAT) and excise taxes on certain products
taxes that place a greater burden on those best able to pay and little or no burden on the poor Proportional Taxes
taxes that place in equal burden on the rich, the middle class, and the poor Regressive Taxes
taxes that fall heavily on the poor than on the rich
It is a structure of taxation in which taxes are levied at a decreasing rate as income rises. generally referred to as Adam Smith’s Canons of Taxation 5. 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
10. Restricted Exemptions