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Chapter TwoTaxation: The Source of Public RevenueAfter completing this chapter you are
expected to:
Discuss the overview of taxation
Discuss the meaning of tax
Explain the objectives of taxation
Understand the characteristics of
taxation
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2.1 Overview of taxation Taxation is a system of raising money to
finance(soldiers and police, build dams&roads, to operate schools and hospitals,
and for hundreds of other purposes) of
government
Taxes are as old as civilization. There has
never been a civilization that has not
collected taxes.
The first civilization that we know that
started in Sumeria, in todays Iraq, the
inhabitants accepted the need to pay tax to
finance a great war. 2
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Overview However, even when the war was over, the
taxmen did not want to give up their privilegeof collecting taxes.
In Ancient civilizations ofPalestine, Egypt,
and Babylonia, rulers earned income in theform of food from their land, and metals from
their mines.
They taxed farmers by requiring them to givesome proportion of crops to the state.
People were also forced to work for the
rulers because the kings were the sole owner
of everything. 3
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Overview Poll taxes were a major source of revenue in
Egypt during 323 BC- 30 BC.
The government of ancient Athens (Greece)
relied on publicly owned silver mines, tribute
from conquered countries, a few customs
duties and voluntary contributions from
citizens for revenue.
Romans used to pay poll taxes in earlier
days, but govt exempted citizen from this
tax in the 2nd century. More than 100 years
later, Emperor Augustus introduced land and
inheritance tax. 4
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Overview
During the Middle Ages (5th to 15th century AD),
Europeans were subject to many forms of
taxation such as land tax, poll tax, inheritance
tax, and toll tax (payment for the use of roads,
bridges etc). Roman Catholic Church also collected tithe,
fees, fines, and tolls.
These urban centers collected revenues usingtaxes on property as well as sales tax from
certain items.
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Overview
During 16th and 17th centuries European states
relied heavily on the revenue generated fromthe Kings own states and from tax on land.
The power of Parliament grew steadily and in
1689 the English Bill of Rights guaranteed thatthe king could not tax without parliaments
consent.
By18th century England started imposingvarious taxes on transactions. Taxes on
imported goods assumed greater importance.
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Overview In the late 19th and 20th centuries, concerns
about both fairness and ability of tax systems togenerate tax revenue led governments to enact
income tax.
The first progressive income tax was firstintroduced in Prussia in 1853.
Other countries like Britain, United States, and
France introduced progressive income tax in
1906, 1913, and 1917 respectively.
Although income taxes generated little revenue
at first, they play a major role in all modern tax
s stem toda .7
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2.2. Meaning and definition of tax
A tax is a compulsory charge imposed bythe Government without any expectation of
direct return or benefit to the tax-payer.
This implies that there is no quid pro quorelationship between the government and the tax
payer.
Taxes can also be defined as paymentsextracted by government from people and
organizations to fund public expenditure, without
rendering proportionate benefit, by the use of
law 8
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Cont. In a modern state, government is expected to
offer public goods like: Defense, high ways, etc.
These public goods have the characteristics of
none excludable (consumption of such goods by
one person is impossible to exclude others) and
non rival (once a good is provided, the additionalcost of another individual consuming the good is
zero).
There is no price mechanism to protect nonexcludability & none rival in consumption goods,
as a result, Private sectors cannot supply it.
Therefore, government is forced to levy taxes to
finance these and other necessar ex enditures.9
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Cont.
The act of laying a tax or of imposing taxes, as
on the subjects of a state, by government, or onthe members of a corporation or company, by
the proper authority is known as taxation.
Not only financing of public goods, Taxation isone of the component of fiscal policy and it can
enable government to stabilize the economy and
adjust the income distribution.
We also argued that taxation should be efficient
and contribute to economic growth.
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Cont.
It constitutes an involuntary saving by
taxpayers which is diverted to government
for use in resource allocation.
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2.3 Characteristics andObjective of Taxation
Characteristics of Taxation
i) Tax is a compulsory contribution: no
taxpayer can refuse the payment on the ground
that he/she doesnt receive any direct and
immediate benefit.
ii) The taxpayer will be required to pay tax if it
is due form him: Taxes cannot be demanded
from a person if it is not required to be paid.
For example, tax on liquor cannot be collected
from a person who doesnt drink liquor. 12
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Characteristics of TaxationIII) Taxes are levied by government: Nobody
else has the right to do so. By any meansnecessary and feasible, the government will
claim its right to collect taxes by the use of law.
IV) Common benefits to all: The expenditureincurred by government through the collection of
tax is meant for all the people regardless of who
pays tax and who do not.
V) No Direct benefit: When an individual pays
taxes, he cannot expect to receive an
immediate, direct, and equivalent amount of
service from the government in return. 13
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Cont.
VI) Certain Taxes are levied for specific
objectives: Government levies tax on certaingoods in order to reduce its consumption by the
public too. For example, Government levies
taxes on luxury goods to reduce its consumption
and divert the resources to production and
distribution of essential goods.
VII) Attitude of Taxpayers:
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Cont.
VII)Tax system goes in harmony with the
National objectives: It tries to accommodatethe problems of taxpayers. The system should
be flexible with the changing requirements of the
economy.
VIII) Funding public expenditure:Money
collected from taxes will be used for
expenditures such as construction of roads,
payment of salaries of civil servants, financing ofpublic programs and projects etc.
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Objectives of Taxation: Revenue generation, however, is not the only
objective of taxation, though it is clearly theprime objective.
The specific purposes of levying taxes may be
summarized as follows:
Supporting the operations of government
Influencing the macro economic performance ofthe economy. Governments achieve this through
its fiscal policy.
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Cont. Carrying out the functions of the government
such as national defense and providinggovernment services.
Redistributing resources between individuals or
sections in the population.
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Cont. General Objectives: In the beginning,
Government imposed taxes for three basicpurposes these are, to cover the cost of
administration, maintaining law and order in the
country, and for defense. But, in modern days,
there have been a lot of changes in theGovernments expenditure pattern.
Today, the Government is in the position to
restore social justice in the society by way ofproviding various social services like education,
employment, pension, public health, housing,
sanitation and the development of weaker
sections of the society. 18
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Cont. Non-tax revenues are not sufficient to meet the
entire expenditures. Hence, Governmentimposes taxes of various types.
The general objectives of taxes include:
1. Raising Revenue
2. Removal of Inequalities in Income &Wealth.
3. To change peoples behavior.
4. To reduce private consumption
5. To promote Economic growth and stability19
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Cont.6. Reduction in Regional Imbalances
7. Capital Accumulations
8. Beneficial Diversion of Resources.
9. Creation of Employment Opportunities
10. Encouragement of Exports
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