Chapter - Two: Meaning and Characteristics of Taxation
Chapter - Two: Meaning and Characteristics of Taxation
Chapter - Two: Meaning and Characteristics of Taxation
Taxation
Meaning of tax
A tax is a compulsory levy payable by an economic unit to
the government without any corresponding entitlement to
receive a definite and direct return from the government.
It is not a price paid by the taxpayer for any definite
service rendered or a commodity supplied by the
government.
Characteristics of a good tax system
The following are the characteristics of a good tax
system:
1.Tax is a compulsory Contribution
2.The Assesses will be required to pay tax if it is due from him
3.Taxes are levied by the government
4.Common benefits to all
5.No direct benefit
6.Certain taxes are levied for specific Objectives
7.Attitude of the Tax-payers
8.Good tax system should be in harmony with national objectives
9.Tax system recognizes basic rights of tax payers
Purpose/Objectives of Taxation
The main objective of taxations are:
• Raising revenue
• Removal of inequalities in income and wealth
• Ensuring economic stability
• Reduction in regional imbalances
• Capital accumulation
• Creation of employment opportunities
• Preventing harmful consumption
• Beneficial diversion of resources
• Encouragement of exports
• Enhancement of standard of living
Canons of Taxation
• Canons of taxation refer to the fundamental principles that govern the
system of taxation. Taxation of people must be levied with great care
and rationality.
• Of the canons of taxation four of them are enumerated by Adam
Smith and the rest are contributed by other economists. This are:
1. Canon of Equality:
• This canon proclaims that a good tax is that which is
based on the principles of equality. It implies that
the income which a person enjoys under the
protection of the state should be taxed on the
proportional rate of taxation. But modern
economists do not agree with Adam Smith. They
advocate progressive taxation to observe the canon
of equality.
2. Canon of Certainty:
• canon of certainty implies that the tax-payer should
be well informed about the time of payment, the
manner of payment, the quantity to be paid, should
all to be clear and simple to the contributor and to
every other person.
3. Canon of Convenience:
• The third canon of Adam smith is that of
convenience. According to Adam smith, “every tax
ought to be so levied at the time or in the manner
in which it is most likely to be convenient for the
contributor to pay it.
4. Canon of Economy:
• This canon implies that the administrative cost of tax
collection should be minimum, i.e. the difference between
the money, which comes out of the pockets of people and
that which is deposited in the public treasury, should be as
small as possible.
7. Canon of Diversity:
This cannon implies that there should be all types of
taxes so that everyone may be called upon to
contribute something towards the revenues of the
state.
8. Canon of Simplicity:
• the canon of simplicity implies that a tax should easily be
understood by the tax-payer i.e., its nature, aims, time of payment,
method and basics of estimation should be easily followed by each
tax-payer.
Progressive tax
When the rate of taxation increases as the tax payer’s income
increases, it is called a progressive tax. In this system, the
rate of tax goes on increasing with every increase in income.
Regressive taxation
A regressive tax is one in which the rate of taxation decreases as
the tax payer’s income increases. Lower income is taxed at a
higher rate, whereas higher income is taxed at a lower rate.
Digressive taxation
A tax is called digressive when the rate of progression in taxation
does not increase in the same proportion as the increase in
income.
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COMPONENT OF TAX STRUCTURES
4. CAPITAL GAINS TAX – tax levied on the capital
gains(e.g. sale of lands and buildings). It is the
difference between the price at which an
item/property was acquired and the price at
which the item/property is disposed or sold.
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COMPONENT OF TAX STRUCTURES
5. CUSTOM DUTIES - taxes that must be paid to the
government on goods brought in from other
countries. There are varying rates of customs duties
levied on a wide range of products/ goods imported
into the country.
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COMPONENT OF TAX STRUCTURES
6. EXCISE TAXES – are a flat rate tax levied on
domestically produced goods such as alcoholic
drinks. The tax is levied for budgetary reasons
and partly for environmental and health
consideration to reduce the consumption of
extravagant goods.
• There can also be an imposition of excise taxes
on imported goods.
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SHIFTING AND INCIDENCE OF TAXES
Meaning of Impact, Shifting, and Incidence
• Meaning of Impact
The term impact is used to express the immediate
result of or original imposition of the tax.
• Luck of publicity
• Moral and psychological factors
• Attitudes of income tax departments
• Officers of the department of taxation
authority should be men of integrity
• Corrupt business practices
Methods of tax evasion
• Omission to report taxable income
• Maintenance of multiple set of books of accounts
• Opening accounts under dummy names
• Securing contracts under dummy names
• Deduction of personal expenses as business
expenses
• Omission to report several incomes from irregular
sources
• Understatement of receipts
• Overstatement of business expenses
Remedies for tax evasion
• Thorough overhauling of tax laws: one of the main reasons for tax
avoidance and tax evasion is loose drafting of tax laws which
contain several loop-holes and weak points that enable the tax
evaders to carry on the unlawful activities.
• Reduction in tax rates
• Permanent account number
• Tax on agricultural income accounts
• Change in penal provision
• Maintenance of proper account
• Vigorous prosecution: to make people aware of their duties and
responsibilities towards the state and to teach in them a respect for
tax laws, the authority should adopt vigorous prosecution policy.
• Educating people
Chapter three: Public Finance in Ethiopia
• Public Expenditure in Ethiopia