Types of taxation, features of taxation What is taxation? 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 on goods and services.–Types of taxation, features of taxation
FEATURES OR CHARACTERISTICS OF TAXATION
It is a compulsory levy that must be paid by individuals or corporate bodies.
It is levied by the government or its agencies.
It is a payment made as a sacrifice
Tax is meant for the general welfare of everybody
Tax payment has age limit, e.g. people must attain a certain age level before they can pay tax.
PRINCIPLES OF TAXATION
What is taxation? 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.
The principles of taxation are a set of guidelines or fundamental concepts that serve as a basis for designing and implementing a fair and effective tax system. While different economists and theorists may have slightly different interpretations, here are some commonly accepted principles of taxation:
Equity or fairness: Taxation should be fair and equitable, meaning that individuals and businesses with different levels of income or wealth should pay taxes in proportion to their ability to pay. This principle can be achieved through progressive taxation, where tax rates increase as income or wealth increases, or through other mechanisms that ensure a fair distribution of the tax burden.
Simplicity: A tax system should be simple and easy to understand, both for taxpayers and tax administrators. Complex tax laws and regulations can create confusion, increase compliance costs, and potentially lead to tax evasion. Simple tax systems are more transparent, promote compliance, and reduce administrative burdens.
Efficiency: Taxation should be efficient in terms of both economic efficiency and administrative efficiency. Economic efficiency means that taxes should not distort individuals’ or businesses’ behaviour in a way that reduces overall economic output or efficiency. Administrative efficiency refers to the cost-effectiveness of tax collection and enforcement, minimizing administrative costs and maximizing revenue collection.
Certainty: Tax laws and regulations should be clear, stable, and predictable so that taxpayers can plan their financial affairs accordingly. Certainty helps reduce uncertainty and allows individuals and businesses to make informed decisions about their investments, savings, and consumption.
Adequacy: Taxation should generate sufficient revenue to fund the government’s expenditures and public services. Taxes should be set at levels that are adequate to meet the government’s fiscal requirements while minimizing the need for excessive borrowing.
Neutrality: Tax systems should be neutral and avoid favouring or discriminating against specific individuals, industries, or economic activities. Neutral taxes do not distort market behaviour and promote economic efficiency.
Flexibility: Tax systems should have the ability to adapt and respond to changing economic and social circumstances. Flexibility allows tax policy to be adjusted as needed to accommodate changes in the economy, demographics, and other relevant factors.
Tax on the other hand is defined as a compulsory levy imposed by the government or its agency on individuals and firms or on goods and services.
FEATURES OR CHARACTERISTICS OF TAX
It is a compulsory levy that must be paid by individuals or corporate bodies.
It is levied by the government or its agencies.
It is a payment made as a sacrifice
Tax is meant for the general welfare of everybody
Tax payment has age limit, e.g. people must attain a certain age level before they can pay tax
PRINCIPLES OF A GOOD TAX SYSTEM
Adam smith in this book Wealth of Nation has laid down certain principles of a good tax system which he called canons of a good tax system.
These principles include:
- Equity or ability to pay: People should be made to pay taxes according to their abilities. This implies that tax revenue should be raised without causing undue hardship to the tax payer.
- Economy: The principle states that the cost of tax collection should be cheap relative to the revenue yield
- Convenience: A tax should be convenient as to form, time and place of payment. For example, an import duty should be duly paid as the imported goods arrive in the country.
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 taxpayer.
Revenue yield: From the standpoint of government, the total revenue that a tax yields is of considerable importance. Governments are comfortable with taxes that provide a fairly predictable and steady income.
- Neutrality: An important consideration in evaluating tax affects production, savings and people’s willingness to work. A good tax system should not interfere unnecessarily with the supply and demand for goods and services.
Benefits – revenue principle: It is argued that those who benefit most from government-supplied goods or services should pay the taxes necessary for their financing road construction and repairs and toll gates.
- Flexibility: The tax system should be flexible enough for adjustments when the need arises.
- Simplicity: A tax system should not be difficult to administer and understand. It should not cause problems of differences in interpretation.
REASONS WHY GOVERNMENT IMPOSE TAXES
There are many reasons why the 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:
- To raise revenue: Taxes are used to raise revenue for government. Through this, money required from the provision of essential services, general administrative purposes and financing of capital projects is made available.
- To redistribute income: Through the Pay As You Earn (P.A.Y.E) system, the government can narrow the gap between the rich and the poor by introducing progressive taxation.
Discouragement of production and consumption of harmful goods: Taxes are used to discourage the production and consumption of harmful goods. Indirect taxes imposed can lead to higher prices which can discourage the consumption of certain goods
- To control inflation: Taxes can be used as anti – inflationary device. Government can do this by increasing direct tax without increasing its expenditures.
- To protect infant industries: Taxes can be used to protect newly established industries from competition with foreign firms.
- To correct an adverse balance of payment: Taxes are used to correct an adverse balance of payment. Importation of foreign goods could be restricted by the use of heavy import duties thereby conserving foreign exchange. This will have an effect on balance of payments.
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- 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 cheaper prices than are sold in the country in which they are produced. Dumping ruins local industries easily.
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.
Promotion of economic growth: Taxes can be used to promote economic growth. Government can reduce taxes on company profits so that these profits are plough back into the business to aid expansion and stability
- Retaliatory measure: Taxation can be used as a retaliatory measure in international trade.
- Employment purposes: Government can manipulate taxation to achieve the desired employment level.
- Savings: Taxation can be used to encourage savings and investments.
ECONOMIC EFFECTS OF TAXATION
Effect on production: Production will be affected or reduced if excise duties are high.
Effect on inflation: An increase in indirect taxes and decrease in direct taxes by government can lead to an increase in the volume of money in circulation thereby leading to inflation.
Effect on consumption: Consumption of some harmful goods can be reduced if government imposes heavy tax on such harmful goods.
Effect on investment: Imposition: The imposition of high excise duty, company tax, etc on investors by the government will discourage investors from investing in business.
Effect on prices of goods and services: When government imposes high excise duty this will make the cost of production to be very high which could lead to high prices of goods produced. 
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.
Effect on savings: High level of taxation on individuals or corporate bodies can lead to a reduction in savings
A GOOD TAX SYSTEM
Adam Smith in this book Wealth of Nations has laid down certain principles of a good tax system which he called canons of a good tax system.
These principles include:
- Equity or ability to pay: People should be made to pay taxes according to their abilities. This implies that tax revenue should be raised without causing undue hardship to the taxpayer.
- Economy: The principle states that the cost of tax collection should be cheap relative to the revenue yield
- Convenience: A tax should be convenient as to form, time and place of payment. For example, an import duty should be duly paid as the imported goods arrive in the country.
- 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 taxpayer.
- Revenue yield: From the standpoint of government, the total revenue that a tax yields is of considerable importance. Governments are comfortable with taxes that provide a fairly predictable and steady income.
Neutrality: An important consideration in evaluating tax affects production, savings and people’s willingness to work. A good tax system should not interfere unnecessarily with the supply and demand for goods and services.
Benefits – receive principle: It is argued that those who benefit most from government-supplied goods or services should pay the taxes necessary for their financing road construction and repairs and toll gates.
Flexibility: The tax system should be flexible enough for adjustments when the need arises.
Simplicity: A tax system should not be difficult to administer and understand. It should not cause problems of differences in interpretation. 
REASONS WHY GOVERNMENT IMPOSE TAXES
There are many reasons why the 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:
- To raise revenue: Taxes are used to raise revenue for the government. Through this, the money required from the provision of essential services, general administrative purposes and financing of capital projects is made available.
- To redistribute income: Through the Pay As You Earn (P.A.Y.E) system, the government can narrow the gap between the rich and the poor by introducing progressive taxation.
Discouragement of production and consumption of harmful goods: Taxes are used to discourage the production and consumption of harmful goods. Indirect taxes imposed can lead to higher prices which can discourage the consumption of certain goods To control inflation: Taxes can be used as anti – inflationary device. Government can do this by increasing direct tax without increasing its expenditures
To protect infant industries: Taxes can be used to protect newly established industries from competition with foreign firms.
To correct an adverse balance of payment: Taxes are used to correct an adverse balance of payment. Importation of foreign goods could be restricted by the use of heavy import duties thereby conserving foreign exchange. This will have an effect on the balance of payments.
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 cheaper prices than are sold in the country in which they are produced. Dumping ruins local industries easily.
- 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.
- Promotion of economic growth: Taxes can be used to promote economic growth. Government can reduce taxes on company profits so that these profits are plough back into the business to aid expansion and stability.
- Retaliatory measure: Taxation can be used as a retaliatory measure in international trade.
- Employment purposes: Government can manipulate taxation to achieve the desired employment level.
- Savings: Taxation can be used to encourage savings and investments.
ECONOMIC EFFECTS OF TAXATION
Effect on production: Production will be affected or reduced if excise duties are high.
Effect on inflation: An increase in indirect taxes and a decrease in direct taxes by the government can lead to an increase in the volume of money in circulation thereby leading to inflation.
Effect on consumption: Consumption of some harmful goods can be reduced if the government imposes heavy taxes on such harmful goods.
Effect on investment: Imposition: The imposition of high excise duty, company tax, etc on investors by the government will discourage investors from investing in business.
Effect on prices of goods and services: When government imposes high excise duty this will make the cost of production to be very high which could lead to high prices of goods produced.
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.
Effect on savings: High level of taxation on individuals or corporate bodies can lead to a reduction in savings
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