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FEATURES OF TAXATION, TYPES OF TAXATION AND THEIR EFFECT

     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.

FEATURES OR CHARACTERISTICS OF TAX

It is 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 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.

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 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 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:

  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
  • 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 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 tax payer.
  • 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 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 government. Through this, money required from the provision of essential services, general administrative purposes and financing of capital projects are made available.
  • 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.
  • 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 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 business to aid expansion and stability.
  1. Retaliatory measure: Taxation can be used as a retaliatory measure in international trade.
  2. Employment purposes: Government can manipulate taxation to achieve the desired employment level.
  1. 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 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: Imposition of high excise duty, company tax, etc on investors by government will discourage investors from investing in business.

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.

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

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

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:

  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

  • 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 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 tax payer.
  • 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 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 government. Through this, money required from the provision of essential services, general administrative purposes and financing of capital projects are made available.
  • 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.
  • 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 effect on 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 business to aid expansion and stability.
  1. Retaliatory measure: Taxation can be used as a retaliatory measure in international trade.
  2. Employment purposes: Government can manipulate taxation to achieve the desired employment level.
  1. 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 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: Imposition of high excise duty, company tax, etc on investors by government will discourage investors from investing in business.

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.

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

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

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