Public Finance NotesPublic RevenueFor B.Com/BBA/MBA (CBCS and Non CBCS Pattern)
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Table of
Contents |
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1. Meaning of Public Revenue 2. Sources of Public Revenue 3. Different Classification of Public
Revenue 4. Principles of Public Revenue 5. Effects of Public Revenue 6. Significance of Public Revenue 7. Meaning and Definition of Tax 8. Objectives or Aims of Taxation in
developing Country Like India 9. Characteristics of Ideal Taxation System 10. Canons of Taxation 11. Incidence of Tax and Factors Affecting
It 12. Distinguish between: a)
‘Impact’ and ‘Incidence’ of Taxation. b)
Incidence and shifting of taxes. c)
Incidence and effects of a tax. 13. Taxable capacity of a country 14. Classification of Taxes 15. Difference
between Progressive, Regressive and Proportional tax system |
MEANING OF PUBLIC REVENUE AND ITS SOURCES
A government needs income for the performance
of a variety of functions and meeting its expenditure. Thus, the income of the
government through all sources like taxes, borrowings, fees, and donations etc.
is called public revenue or public income.
However, Prof. Dalton has defined the term in
two senses – broader and narrow sense. In broad sense, it includes all the
income and receipts, irrespective of their sources and nature, which the
government happens to obtain during any period of time. In the narrow sense, it
includes only those sources of income of the government which are described as
revenue resources. In broader view of the concept is that is includes all loans
which the government raises under the term ‘public revenue’ or public income.
The distinction in both can also be explained as the term ‘public revenue’ used
in public finance. It includes only those sources of government income which
are not subject to repayment. In a broad sense, it means all receipts of the
government irrespective of the fact whether they are subject to repayment or
not.
SOURCES OF PUBLIC REVENUE
In a modern welfare state, public revenue is
of two types:
(a) Tax
revenue and
(b) Non-tax
revenue.
(a) Tax Revenue: A fund raised through the
various taxes is referred to as tax revenue. Taxes are compulsory contributions
imposed by the government on its citizens to meet its general expenses incurred
for the common good, without any corresponding benefits to the tax payer.
Seligman defines a tax thus: “A tax is a compulsory contribution from a person
to the government to defray the expenses incurred in the common interest of
all, without reference to specific benefits conferred.
Examples of Tax Revenue
Ø Income
Tax(on income of the individual as well as joint Hindu families)
Ø Corporation
Tax (on income of the companies both domestic and foreign companies operating
in India )
Ø Interest
Tax (on the gross interest income of the financial institutions like
Bank)
Ø Expenditure
Tax(expenditure incurred in luxury hotels and restaurants)
Ø Wealth
Tax(total wealth of individuals and Hindu undivided families)
Ø Custom
Duty.(import and export duty)
Ø Central
excusive Duty.(duties on industrial products)
Ø Service Tax.(on
services provided by hotels,telephones,port services etc.)
(b) Non Tax Revenue: The revenue obtained by
the government from sources other then tax is called Non-Tax Revenue. The
sources of non-tax revenue are:
1. Fees: Fees are another important source of
revenue for the government. A fee is charged by public authorities for
rendering a service to the citizens. The government provides certain services
and charges certain fees for them. For example, fees are charged for issuing of
passports, driving licenses, etc.
2. Fines or Penalties: Fines or penalties are
imposed as a form of punishment for breach of law or non fulfillment or certain
conditions or for failure to observe some regulations. Like taxes, fines are
compulsory payments without quid pro quo. But while taxes are generally imposed
to collect revenue. Fines are imposed as a form of punishment or to prevent
people from breaking the law.
3. Surplus from Public Enterprises: The
Government also gets revenue by way of surplus from public enterprises. In
India, the Government has set up several public sector enterprises to provide
public goods and services. Some of the public sector enterprises do make a good
amount of profits. The profits or dividends which the government gets can be
utilized for public expenditure.
4. Special assessment of betterment levy: It
is a kind of special charge levied on certain members of the community who are
beneficiaries of certain government activities or public projects. For example,
due to a public park in a locality or due to the construction of a road, people
in that locality may experience an appreciation in the value of their property
or land. Thus, due to public expenditure, some people may experience 'unearned
increments' in their asset holding.
5. Grants and Gifts: Gifts are Voluntary
contributions by individuals or institutions to the government. Gifts are
significant source of revenue during war and emergency. A grant from one
government to another is an important sources of revenue in the modern days. The
government at the Centre provides grants to State governments and the State
governments provide grants to the local government to carry out their
functions.
6. Deficit Financing: Deficit means an excess
of public expenditure over public revenue. This excess may be met by borrowings
from the market, borrowings from abroad, by the central bank creating currency.
In case of borrowing from abroad, there cannot be compulsion for the lenders,
but in case of internal borrowings there may be compulsion.
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Also Read following notes:
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Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
************************************
Different classifications of public revenue
Different economists have given various
classifications of public revenue. Looking from different angles, they
classified public revenue in one manner or another. The following are the main
classifications given by different economists or authors:
I.
Adam
Smith’s Classification: Adam Smith was of the opinion that revenue of
the government ultimately depends on the property in possession of the
inhabitants of the country and the extent to which the state has control over
the wealth of the country. Adam Smith classified public revenue into the
following two categories:
1) Revenue from Public: Revenue
from public includes all those sources which are generally known as the sources
of revenue of the government from the public.
2) Revenue from State Property: Revenue
from state property includes revenue obtained from public enterprises as well
as those revenues which are derived from the property in possession of the
state.
This
classification as given by Adam Smith does not serve the purpose of modern
finance. Hence it is subject to criticism.
II.
Bestable’s
Classification: Like Adam
Smith, Bestable also classified public revenue into the following two
categories:
1) Those
incomes which the state receives from its various functions just like a private
individual or corporation. It includes all the incomes which the state derives
in the form of fees and prices.
2) Thos
incomes which the state derives in its own capacity as ‘state’. It includes
taxes and levies.
Like Adam
Smith this classification is also limited and narrow.
III.
Adam’s
Classification: Prof. Adam classified public revenue into the
following three categories:
1) Direct Revenue: It
includes income which the state derives from public land, public enterprises
like rail, roads, highways, posts and telegraph and all other revenues which
the state derives on account of the ownership of productive enterprises.
2) Derivative Revenue: It
includes the income derived from the citizens, such as, taxes, fees
assessments, fines, penalties etc.
3) Anticipatory Revenue: It
includes income from the sale of bonds or other forms of commercial credit. It
also includes income from the treasury notes.
This
classification suffers from the defect of overlapping and there is no clear-cut
demarcation of different heads. It has a wide range of revenues, as it includes
both commercial and administrative revenues in one group in spite of the fact
that both are fundamentally different in nature. Hence this classification is
also not satisfactory.
IV.
Seligman’s
Classification: Seligman classified public revenue into the
following three categories:
1) Gratuitous Revenue:
Gratuitous revenue is that revenue which is derived by the government free of
cost, such as, gifts from the public and others.
2) Contractual Revenue: It is
that revenue which is derived by the state as a result of the contracts entered
into between the public and government. It includes income from land mines and
public enterprises.
3) Compulsory Revenue: It
includes the income derived from state’s authority for administration, justice
and taxation, such as, taxes fees, fines etc.
This
classification suffers from various lacunae and may not be regarded as
satisfactory. However, it is more comprehensive that the earlier
classifications already discussed.
V.
Lutiz’s
Classification: Lutiz classified public revenue into the
following six categories:
1) Administrative
Revenue;
2) Commercial
Revenue;
3) Taxation;
4) Public
Debt;
5) Subventions
and Grants; and
6) Book-keeping
revenue or transfers.
This
classification is outdated and thus unsatisfactory. For example, the last
three, i.e. public debt, subventions, and grants and book-keeping revenues or
transfers are not included in public revenue now.
VI.
Dalton’s
Classification: According to Dalton, there are two main
sources of public revenue, i.e. taxes and prices. A tax is a compulsory charge
imposed by public authority, whereas prices are paid voluntarily by private
persons, who enter into contracts with authorities. Thus, taxes are paid
compulsorily, whereas, prices are contractual payments. Dalton classified
public revenue into the following twelve categories:
1) Taxes;
2) Gifts and
Reparations;
3) Compulsory
Loans;
4) Public
Property;
5) Public
enterprise;
6) Fines in
courts;
7) Fees and
other Payments;
8) Special
Assessment;
9) Public
Monopolies;
10) Mint;
11) Voluntary
Gifts; and
12) Tributes
and Indemnities whether arising out of war or otherwise.
As a
matter of fact, it is not a classification of public revenue on some sound
principles, but actually it is a list of items enumerated above.
VII.
Taylor’s
Classification: Taylor classified public revenue into the
following four categories:
1) Grant-in-aid: Grant-in-aid
are the means by which one government provides financial assistance to another,
usually in the performance of a specified function in a specified manner, e.g.
education and health. Grants are made to the state government by the central
government for some specific purpose. The state government has no obligation to
repay the amount of grant-in-aid sanctioned by central government.
2) Administrative Revenue: These
revenues include fees, licenses, fines forfeitures, escheat and special
assessment. Most of these are voluntary in nature on the part of the payer as
to whether or not he will pay and more or less for the direct benefit conferred
upon him. They generally arise as a by-product of administrative control or
function of government, and hence, they are called as administrative revenue by
Taylor.
3) Commercial Revenue: These
revenues are received in the form of prices paid for government-produced
commodities and services, such as, payments for postage, tolls, tuition fee of
public educational institutions, interest on funds borrowed from government
credit corporations, price paid for liquor in government stores, electricity
and water distributed by government authorities etc.
4) Taxes: Taxes are compulsory payments to
government without expectation of direct return in benefit to the tax-payer,
such as, income-tax, toll-tax, property tax etc. they involve varying degrees
of coercive powers.
PRINCIPLES
OF PUBLIC REVENUE
There are various principles of public revenue
as under:
1. Principle
of Least Aggregate Sacrifice.
2. Principle
of Equity.
3. Principle
of Economy.
4. Principle
of Productivity.
5. Principle
of Certainty.
6. Principle
of Uniformity.
1. Principle of Least Aggregate Sacrifice:
Prof. Pigou and Prof. Dalton developed the principle of least aggregate
sacrifice. According to them, “State should raise money in such a manner that
the sacrifice imposed on the people is the least. As pointed out earlier,
taxation is irksome and the act of raising money a necessary evil. Taxation
therefore imposes sacrifice and pain. The State exists for the welfare of the
masses and therefore should see to it that the sacrifice or pain is least.”
2. Principle of Equity: Economists like A.
Smith and Chapman, Robert Jones considers equity or equality as the right
principle of taxation. Seligman and Cohn accept this principle but understand
it to imply progressive taxation while walker and some other classical
economists think that equality or equity leads to proportional taxation. All
these economists, however, believe in equity. It is worth while therefore
considering in some detail the meaning and implications of equity, as the basis
of taxation.
3. Principle of Economy: Hobson, Wicksteed and
Jones believed in the principle of economy. According to them, Taxation is an
act of production and therefore one must effect as much economy in production
as possible. Whatever the demand side may be, if a certain amount has to be
produced that producer’s has concern is always to produce it at the lowest
cost. Economy is then the correct principle of taxation. But since the cost of
taxation consists in the sacrifices made by the tax-payers, the cost is least
when the sacrifice is the lowest. Thus, the principle of economy is precisely
the same as the principle of least aggregate sacrifice.
4. Principle of Productivity: Principle of
productivity was propounded by Bastable. According to Bastable, the idea of
productivity comes close to that of economy. Taxation is an act of production.
And therefore it should be as productive as possible. Taxation should be as
productive of revenue as the State can make it to be.
5. Principle of Certainty: This principle was
dates back to the name of President Hadley. According to him, tax should be
certain in its manner of imposition and its rate, is not to be doubted.
Uncertainty is never desirable. The statesmen as also the tax payers should know
how and when and what taxes are imposed. It gives greater confidence to the
govt. about its estimates and the tax payers feel certain about his budget.
Certainty reduces the cost of paying taxes for the tax payers and the cost of
them for the govt. certainty helps to reduce cost and thereby increases
welfare.
6. Principle of Uniformity: Principle of
uniformity was analyzed by Nitty and Conrad. According to them, “If uniformity
implies that the taxes should burden the people uniformly, then it is the same
principle as that of equal sacrifice. But if the word uniformity refers to the
manner of levying taxes or the rates of taxes no such similarity between this
principle and that of equal sacrifice can be deduced. It is desirable of course
that tax should possess the feature of uniformity even in the rates and the
manner of their imposition. That reduces the complexity of the system and
thereby conduces to smooth working of the entire machinery.
EFFECTS OF PUBLIC REVENUE
The effects of public revenue can be discussed
under the following heads as:
1. Effects of Revenue-Direct and Indirect: For
the consideration of effects of public revenue on social welfare it is best to
suppose that revenue is raised and then destroyed. That would enable us to
ignore effects that the knowledge and expectation of public expenditure has the
minds of the tax payers. When a tax is levied on an individual his income
decreases. If pays out of his income, then it is directly and immediately
reduced. He decides to pay it out of his savings and current income is not used
but future income derived from his saving decreases. In any case the effect of
taxation is thus to reduce the income of people. This accounts for the
sacrifice of taxation. We may study effects of direct reduction of income and
indirect reduction of it.
The immediate decrease of income takes place,
as we have when the tax payer pays tax out of his current consumable income
when that happens he is force to cut down his present consumption of goods and
services. If he consumes less of luxuries, the adverse effect of taxation
occurs. But if he cuts down his consumption of necessaries more than luxuries
the effects are more pronounced.
2. Effects of Present and Future Generation:
This brings us to the consideration of the effects of taxation on the present
and future generation. When taxes are paid out of current consumable the
present generation directly and immediately suffers. However, they are affected
in two ways. First, the reduction of consumer goods may decrease the efficiency
of the people and thereby the amount of wealth they can produce and save for
succeeding generation. But they also such effects will be partly or wholly
offset by expenditure policy of the govt. But the payment of taxes will
themselves have the effect of shifting the incidence of sacrifice on future
generation to some extent. In the second place, they may suffer due to adverse
effects on production caused by increased demand for consumption goods.
3. Effects on Tax Distribution: The effects of
taxes do not only differ according to the aggregate volume of revenue raised or
according to its impact on current consumable income and savings; they also
depend on the distribution of the tax burden between the tax payers. Taxes not
levied equally on all. They are so levied as to minimize the sacrifice. Thus
some have to pay more than others. If the Govt. is successful in so fixing the
rates of taxes as to minimize sacrifice jointly made by the tax payers, we have
to consider only effects of taxation on the people in the manner that we have
done. But the government is not likely to succeed in minimizing the aggregate
sacrifice.
4. Other Effects on Public Revenue: It is worthwhile considering if taxation can produce some favourable effect on social welfare. We had seen while considering the favourable effects of public expenditure on social welfare; how such expenditures can also have an adverse effect on the well-being of the people.
SIGNIFICANCE
OF PUBLIC REVENUE
The public revenue of one country differs in
amount from that of another country. The difference is due partly to the size
of country and partly to other causes. India is not a small country. It is
sub-continental in itself. Its stages are as big as some counties of the west.
But its public revenue is not very big in size. What does the size of public
revenue then indicate. It depends on the following aspects.
1. Sign of Prosperity: A man who has a big
income is in general respected more than the other who has a smaller income. It
is only rarely that people with small income are held in high esteem by
society. And in the same way a country that has a small volume of public
revenue is not regarded as a big power and consequently not respected by other
counties. A State that has a big volume of public revenue considered as a power
to be reckoned with. America and United Kingdom have public revenue that is
several times higher than that of our country. And we knows they do, that they
can afford to do things that require much money.
2. Welfare of Country: Other things being
equal, however, the welfare of a country can be judged from the size of its
public revenue. A country whose resources, both natural and human, are not
fully developed is a poor and backward country. And the government of such a
country must necessarily be poor also. And with poverty of wealth goes also the
poverty of welfare unless other things are not the same.
3. Composition of Public Revenue: Yet, it is
not merely the size of public revenue the one should look to in order to form
some idea of the prosperity or otherwise of a country. The composition of
public revenue is as much important as its size. If a large part of the wealth
of the government comes from the poor it is not a sign of a healthy state of
affairs.
4. Mere Availability of Means: Public revenue
is only, a means and the mere availability of means indicates nothing. All
depends on how the means are utilized. It is not safe, therefore, to reckon
with merely the size of revenue. Some countries of the world have public
revenue in thousands of millions. The tendency today is on the one hand to
spend an increasing percentage of public revenue on social services and social
security. On the other hand, everywhere more and more money is being diverted
to the building up of strong defensive and offensive force.
5. Manner of Public Revenue: A word may again
be said about the manner in which revenue is obtained from the people. Every
government tries to get more money from the rich that from the poor. But not all
succeed in so doing. Some fail because they are ignorant and some fail because
they are careless. And we have to say also that some fail because they are
mischievous.
Meaning and Definition of Tax
In simple words, it is a compulsory payment by
the people. If a person defies the tax payment, he may be punished in the court
of law. However, different economists tried to define taxation in a different
style as stated below :
Adam Smith : “A tax is a contribution from
citizens for the support of the state.”
Saligman: “A tax is compulsory payment from a
person to govt. to defray the expenses incurred in the common interests of all
without reference to special benefits conferred.”
Bastable : “Tax is a compulsory contribution
of the wealth of a person or body of persons for the service of the public
powers.”
Taussig : “The essence of a tax is
distinguished from other charges by govt. in the absence of direct quid pro quo
between the tax-payer and public authority.”
Dalton : “A tax is a compulsory contribution
imposed by a public authority irrespective of the exact amount of service
rendered to the tax-payer in return and not imposed as penalty for any legal
offence.”
From these mentioned definitions, it is clear
that the taxes are not a voluntary contribution by the tax-payer but it is
compulsory in nature. Therefore, one can say that every payment by individuals
to the state is not a tax. It is just like withdrawal from the people’s income
which reduces their purchasing power. It should be noted here that tax checks
production where as public expenditure may spurt the productive process. In the
opinion of Dr. R.N. Bhargava, taxes are as much compulsory as other payment,
like fees etc. In this context, Dalton says, “Where taxation, taken alone, may
check production, public expenditure taken alone, should almost certainly
increase it.” So, tax is a necessary contribution by the tax-payer to social
objectives like reducing inequalities in income and wealth, securing high level
of employment as well as promoting economic stability with growth.
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Also Read following notes:
************************************
Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
************************************
OBJECTIVES OR AIMS OF TAXATION IN A DEVELOPING COUNTRY LIKE INDIA
The main objectives of taxation are as
follows:
1) Raising
Public Revenue: Normally, the foremost objective for the imposition of taxes,
that is, to collect revenue for the govt. Today the govt. has assumed
responsibilities of providing social services, promoting economic development
and meeting war expenditure. All these expansions in the scope of economic
activities have created necessity of greater funds to be spent by the govt. The
greater the need of funds, the greater is the resort of taxation.
2) Regulation
and Control: The objective of taxation is regulation and control. The govt. not
only raises public revenue through taxation but also imposes restrictions on
the use of certain goods and service in a way desirable and respectable for a
healthy state of society. To restrict the consumption of harmful goods – excise
duty on tobacco, liquor etc. is imposed to restrict the consumption of these
harmful goods. On the other hand, there are import and export duties which also
raise public revenue but their specific objectives are otherwise. Import duties
(taxes) are levied in order to restrict imports of these goods which may harm
the infant industries in the country. Similarly, luxury goods may be taxed
heavily while being imported so as to divert the national funds to some other
forms of production necessitated inside the country.
3) Reduction
of Inequalities in Income and Wealth: Another objective of taxation is to
reduce the inequality of income and wealth. One of the chief characteristics of
underdeveloped countries is that there is a vast gap between the income of
persons in the highest income group and of those in the lowest income group.
That is why one of the objectives of taxation is to redistribute income and
wealth in such a way as to ensure more just and equitable distribution.
4) Promotion
of Capital Formation: Another objective of taxation is the promotion of capital
formation. In underdeveloped and developing countries, one of the main
objectives of taxation is to make savings more dynamic and promote capital
formation. Thus, the savings can be easily directed towards production and
capital formation through the assistance of taxation.
5) Business
Stability and Maintaining Full Employment: Another objective of taxation is to
bring about business stability and maintain full employment conditions. Low
rate taxation during a business depression shall accelerate more income to the
people and help in raising demand and, thus, revive business activity. On the
contrary, high rates of taxes and additional taxes may be useful to check
inflationary pressure on prices.
6) Political
Objectives: In democratic countries taxation is used as weapon for attaining
political objectives. For instance, lower and middle-class voters may be
attracted by imposing high taxes on rich people and luxury goods and nominal or
no taxes on goods consumed by poor and middle-class people. Thus, it also
fulfils the need of political objective in a country.
7) Increase
in National Income: Another objective of taxation is to increase the national
income. Tax is the main source of the govt. income. This income is used for
productive purposes and thereby overall production is increased. This increase
in production leads to increase in national income of the country along with
increase in per capital income.
8) Restriction
on Unnecessary Consumption: Another objective of taxation is to restrict the
unnecessary consumption particularly of harmful commodities, such as wine,
cigarettes, biris, bhang etc. When heavy tax is imposed on such commodities,
the consumption of such commodities are automatically reduced. According to
A.P. Lerner, “Individuals should be taxed only to the extent to make the
tax-payer poorer.”
9) Proper
Standard: Another objective of taxation is the maintenance of proper standard.
According to A.P. Lerner, “Taxes should not be imposed simply because the govt.
needs money. Economic transaction should be taxed only when it is thought
desirable to discourage these transactions. Individuals should be taxed only
when it is desirable to make the tax-payer poorer.”
CHARACTERISTICS OF IDEAL TAX SYSTEM OR REQUIESTES OF A SOUND TAX SYSTEM
A good or ideal tax system is one which
fulfils all the canons of taxation, which is helpful to provide sufficient
revenue to the government for meeting the expenditure and at the same time
offer minimum inconvenience to the tax-payer. According to Edmund Burke, “It is
difficult to tax and to please as it is to love and to be wise.” That we mean
by a good or deal tax system is simply the predominance of good taxes; taxes
which fulfils most the canons taxation. The following characteristics should be
there in order to be called a good or deal tax system:
1) Tax Ratio:
It is difficult to determine the tax ratios by a fixed norm. The opportunity
cost of raising more revenue, the benefit to be derived from extra public
spending and cost of servicing public sector debt all changes over time and
differ across countries. Decisions on public spending, borrowing the revenue
are highly interrelated, if they are to set, they must be set jointly.
2) Efficiency
and Growth: It is often difficult to design a tax structure that will satisfy
the aims of efficiency as well as growth. In order to raise higher revenue,
there is need to change the base or rate of some taxes at least. In that case
firms and individuals will bring about a change in the allocation of resources
from heavily taxed industries to lightly taxed one. In the event of market
prices reasonable reflecting social costs and benefits, the above tax change
will require a tradeoff between revenue and efficiency. When market price do
not reflect social costs and benefits, taxes can be utilized to improve
allocation of resources.
3) Equity in
Taxation: Equity is another issue that is associated with any tax reform. There
are two types of equity viz. horizontal equity and vertical equity. The former
is concerned with the treatment of person with similar incomes, while the
latter is more concerned with reduction in income inequality. Tax system of
developing countries fails miserably in terms of horizontal equity. In the case
of vertical tax equity too, the record is no better and it is so in spite of
progressive tax structure because it is not fully applied. Another factor is
large scale tax evasion.
4) Taxes
should observe all the Canons: The taxes should be so imposed that they are
equitable, convenient to pay, certain, economic, productive, elastic and
simple. The essence of the argument is that majority of the taxes should
observe most of the canons.
5) Taxes
should ensure maximum Social Advantage: Another major characteristic of a good
tax system is that it should ensure maximum social advantage. The imposition of
taxes should be on the basis of this fundamental principle of public finance.
It must ensure maximum social advantage or least aggregate sacrifice.
6) Balanced
Tax System: Another major pre-requisite of good tax system is that it should be
balanced. It means that tax system is simply that it should exist not one kind
of taxes but all kinds of them in a proper balance. For example, both direct
and indirect tax systems have their advantages and disadvantages. But it is
required of a good tax system to have both kinds of taxes in a proper balance.
7) Many
Dimensions of Tax System: A tax has many dimensions. We should look into its
volume, composition, rates, coverage, timings of collection, mode of collection
and so on in order to see its effects in their totality. Each system will have
its own merits and demerits in terms of its social and economic effects. Thus,
in general, it is very difficult to evolve a tax system which is the best or
ideal in every respect.
8) Universal
Application of Taxes: Another main characteristic of a good tax system is that
it should ensure universal and uniform application of taxes to each individual
of the society without any discrimination.
9) Desirable
Effects on Production and Distribution: A good tax system is one which has
desirable effects on production and distribution. It should ensure a rapid
economic development of the country. A good tax system always promotes
production, encourages people to work, save and invest, and increases national
income and its equitable distribution.
10) Source of
Public Revenue: To consider a tax system ideal, it must have the quality to
provide public revenue. Tax is an important part of the total revenue of the
budget. It is a source of public revenue and hence it should provide necessary
revenue to the government.
11) Freedom
from Harassment: A good or deal tax system recognizes that tax-payer has some
basic rights. He is prepared to pay his taxes but would not like to undergo any
harassment. With this in view, tax laws should be simple in language and the
tax liability should be easily determinable with certainty.
CANONS OF TAXATION
In the modern age, tax is the main source of
Income. Every tax is an additional burden on the tax-payer. Thus, it is
essential that the burden of a tax should be divided in equitable manner. Every
govt. bears the responsibility to provide certain facilities to its subject.
For this purpose, the govt. has to adopt a definite principle. Further, it
needs a definite machinery for imposing, collecting and utilizing the money.
Therefore, a better taxation system speaks of the better taxing capacity and
efficient economic administration of the governments.
It is an important question as to how the
taxes can be levied and what should be pattern of distribution of the taxes.
Moreover, taxation does not have only economic but also social and political
implications. For every new tax, it is correct to note the ‘motive’ behind such
proposals. In short, it carries the motives of capacity to pay, no discrimination
and positive effect on the balance of payment.
However, these motives cannot be achieved
unless a clear cut policy regarding the imposition of taxation is followed.
Economists have suggested various principles regarding taxation. But none of
had given the exact canons of taxation. The canons or principles given from
time to time bear the testimony of a good taxation policy.
ADAM
SMITH’S CANNONS TAXATION
Adam Smith was the first writer to give a
detailed and comprehensive statement of the principles of taxation. Basically,
he laid stress on the ways in which an economy could increase its productive
capacity and ultimately achieve a higher rate of economic growth. According to
him, if the principles enunciated by him, were adopted in a full spirit, the govt.
would have a very sound taxation policy. Findlay Shirras has strongly commented
on the contribution made by Adam Smith, “No genius, however, has succeeded in
condensing the principles into such clear and simple canons as has Adam Smith.” Adam Smith has enumerated the
following four canons of taxation which are accepted universally:
1) Canon of
Equality.
2) Canon of
Certainty.
3) Canon of
Convenience.
4) Canon of
Economy.
1) Canon of
Equality: According to this canon, a good tax is that which is based on the
principle of equality. In a broader sense, equality may be considered to be
same as justice. In this principle, it is maintained that the tax must be
levied according to the taxpaying capacity of the individuals. Adam Smith had
defined this principle as follows: “The subject of every state ought to
contribute towards the support of the government, as nearly as possible, in
proportion to their respective abilities that is , in proportion to the revenue
which they respectively enjoy under the protection of states.”
In other words, the principle of benefit
states that the burden of taxation should be fair and just. Thus, rich people
must be subjected to higher taxation in comparison to poor. The higher the
income and higher the tax, the lower the income of lower the tax.
2)
Canon of Certainty: Another canon of taxation
is the certainty which implies that the tax-payer should determine the
following manners carefully: (a) The time of payment, (b) Amount to be paid,
(c) Method of payment, (d) The place of payment, (e) The authority to whom the
tax is to be paid.
With this, a tax-payer will be able to keep
equilibrium between his income and expenditure. There should not be any embarrassment
and confusion about the payment of tax. Every tax-payer must know the time of
payment, manner and mode of payment, so that he may adjust his expenditures
accordingly. In the words of Adam Smith, “The tax which each individual is
bound to pay ought to be certain the not arbitrary. The time of payment, the
manner of payment, the quantity to be paid, all ought to be clear and plain to
the contributor and to every other person.” This certainty creates confidence
in the contributor of the tax.
3) Canon of Convenience:
The taxes should be levied and collect in such a manner that it provides the
maximum of convenience to the tax-payers. The public authorities should always
keep this point in view that the tax-payers suffer the least inconvenience in
payment of the tax. For example, land revenue should best be collected at the
harvest time. The income-tax from the salaried class be collected only when
they get their salaries from their employers. To quote Adam Smith, “ Every tax
ought to be levied at the time or in the manner in which it is most likely to
be convenient for the contributor to pay it.” This canon is important both for
the tax-payers and the govt. The tax-payer feel convenient in payment of tax.
The authorities also come to know the incidence of taxation and get increased
income by way of taxes.
4) Canon of
Economy: It implies that minimum possible money should be spent in the
collection of taxes. The maximum part of the collected amount should be
deposited in the govt. treasury. Thus, all unnecessary expenditure in the
collection should be avoided at all costs. In the words of Adam Smith, “Every
tax ought o be so contrived as little to take out and to keep out of the
pockets of the people as possible over and above what is brings into public
treasury of the state.” So more addition should be secured to the public
revenue at the minimum maintenance cost. It also implies that a tax should
interfere as little as possible with the productive activity and general
efficiency of the community so that it may not create any adverse effect on
production and employment.
Incidence of Tax
Incidence of tax or taxation is the burden of
paying tax ultimately. In other words, when the money burden of a tax finally
settles or comes to rest on the ultimate tax payer, it is called the incidence
of a tax. The incidence of tax remains upon that person who cannot shift its
burden to any other person, i.e. who ultimately bears it. The burden of a tax
falls either on the buyer or on the seller. If the price of a commodity rises
by the full amount of the tax, the incidence is wholly on the buyer. On the contrary,
if the price of the commodity does not rise at all, the incidence is wholly on
the seller. In case the prices rise by less than the full amount of the tax,
the incidence is partly on the buyer and partly on the seller.
The concept of incidence of tax or taxation
has been variously defined by different economists. According to Dalton, we may
say that the incidence is upon those who bear the direct money burden of the
tax. For example, when a sales tax is imposed on Tata Steel, but the company’s shop
recovers it from the buyers, so the incidence of this tax lies on the buyers
since they ultimately bear its money burden. Mrs. Ursula Hicks, however,
classified incidence of taxation into two categories: formal incidence and
effective incidence of taxation. The Taxation Enquiry Committee also adopted
the definition as given by Mrs. Hicks while studying the problem of incidence
of taxation in India. The Taxation Enquiry Commission defined the formal and
effective incidence of taxation as Formal incidence is the money burden of
taxes resting with the subject on whom the burden is intended by taxing
authority to fall, and effective incidence is the real or final distribution of
tax burden after its shifting in consequences of changing demand and supply condition
of taxed commodity or services. In this sense, formal incidence refers to the
concept or incidence of taxation and effective incidence to the effects of
taxations.
Factors
Influencing the Incidence of Taxation: The following are the factors
influencing the incidence of taxation are as follows:
1) Elasticity of Demand and Supply: In case,
the demand of the commodity is elastic, the burden of the tax shall fall on the
trader because if the trader tries to pass on the burden to the consumer in
form of a higher price, the consumer will reduce the consumption of the
commodity to the minimum. As such, he would prefer to bear the burden of tax
himself. On the contrary, if the demand of the commodity in question is
inelastic, the trader can easily shift the burden of the tax to the consumer.
In case
the supply of the commodity is elastic or if the commodity is not perishable,
the burden of the tax will fall on the consumer because the bargaining power of
the trader is much higher than that of the consumer. On the contrary, if the
supply of the commodity in question is inelastic or if the commodity is easily
perishable, the incidence of the tax will be on the shoulders of the trader
because the trader cannot store it for long on account of the perish ability of
the commodity. The entire burden will fall on the trader.
2) Availability of Substitutes: Another
factor affecting the incidence of taxation is the availability of substitutes.
For instance, take the case of tea and coffee. If the government levies a high
excise duty on coffee, the coffee merchant cannot pass this burden to the
consumers because if he shifts the burden of excise duty to the consumers in
the form of higher coffee prices, the consumers may start using tea which is a
good substitute of coffee.
3) Amount of Tax and the Taxation System: In case
the amount of the tax on the commodity in question is very small, then, in such
a situation, the trader may not like to pass the burden on to the consumers
because he may not like to displease his valued customers, e.g. 5% tax imposed
on brokers of Stock Exchanges in India.
4) Mobility of Capital: Mobility
of capital is another factor which also influences the incidence of a tax. In
case the capital is not mobile, the producer has invested a major part of his
capital in his business in fixed assets (land, building, machinery etc.) and
thereby he cannot withdraw it easily, then he may not be in a position to shift
the burden of taxes to the consumers. He will have to bear the burden himself.
On the contrary, if the capital is mobile, the producer has invested most of
his capital in stock of raw material and partly finished goods etc. and thereby
he can withdraw it easily, then he is in a position to shift the burden of
taxes on to the consumers. Thus the consumers will bear the burden.
5) Influence of the Laws of Production: Laws of
production also influence the incidence of a tax. Let us take the law of
increasing returns and law of decreasing returns:
a) Law of Increasing Returns: Let us
take a product which is being produced under the law of increasing returns. In
case, the government levies new tax or increases the present levy, the price of
the commodity is liable to increase. In that case, the price of the commodity
will increase in step with the extent of the tax so imposed or increased. For
example, suppose a firm is producing 1,000 units of the commodity and the cost
of production comes to Rs. 10 per unit. Now the government levies excise duty
to the extent of Rs. 1 per unit. The price of the commodity will now rise to
Rs. 11 per unit. As a result of this rise in price, the demand of the commodity
will decline necessitating a cut in its production. In case the production is
cut down, its cost per unit will automatically rise on account of the reduction
in the output because the commodity is being produced under the law of
increasing returns. Assuming that the cost of production per unit rises up to
Rs. 11 per unit, and commodity is being taxed at the rate of Rs. 1 per unit.
Thus, the overall price of the commodity will rise to Rs. 12 per unit. It is
clear that the price of the commodity in this case has increased in proportion
greater than the increase in the tax. The tax is only Rs. 1 per unit whereas
the price of the commodity has increased by Rs. 2 per unit.
b) Law of Diminishing Returns: Let us
assume that the production of the commodity is subject to the law of
diminishing returns. In the above example, if the government levies the tax as
the rate of Re. 1 per unit, the price of the commodity will now rise to Rs. 11
per unit. With the rise in price, the demand for the commodity will go down,
and, consequently production will have to be cut down. Since the commodity is
being produced under the law of diminishing returns, the cost of production per
unit will also decline consequent upon the reduction in the production.
Assuming that the cost of production falls down to Rs. 9.50 paise per unit and
the commodity is taxed at the rate of Re. 1 per unit, the overall price will
come to Rs. 10.50 paise per unit only. In other words, the price of the
commodity rises to an extent less than that warranted by the imposition of the
tax.
c) Tax Area: Tax area is also an important factor
which influences the incidence of taxation. It may be very difficult or
impossible to shift a purely local tax, if it is relatively high, i.e.
Municipal Corporation Tax. But when a local tax is light, it may be possible to
shift it without any great difficulty. For example, State Sales Taxes tend to
be more easily shifted then local taxes because they are uniform over a wider
area, and national sales taxes tend to be even less difficult to shift.
Distinguish between:
a) ‘Impact’
and ‘Incidence’ of Taxation.
b) Incidence
and shifting of taxes.
c) Incidence
and effects of a tax.
(i) Difference
between Impact and Incidence of Taxation is as follows:
1) The impact
refers to initial or immediate burden of the tax while incidence refers to the
ultimate burden of the tax.
2) Impact is
felt by the tax payer at the point of imposition of the tax, whereas the
incidence is felt by the tax payer at the point of settlement or rest of the
tax.
3) Impact of
the tax can be shifted, but the incidence of a tax cannot be shifted.
4) The impact
of the tax is felt by the person from whom it is collected. For example, if an
excise duty of Rs. 1,500 per TV set is imposed on the manufacturer of coloured
TV set, the impact of tax falls on him. On the other hand, the incidence of tax
is felt by the person who actually bears the burden of the tax. For example, if
the manufacturer of TV set successfully passes the excise duty burden on to the
customer, the incidence of tax will fall on the customer.
5) The impact
is just the beginning of taxation, whereas incidence is the end of taxation.
6) It is
illegal to escape from impact, whereas it is legal to make efforts for escaping
from incidence.
(ii) Distinction
between Incidence and Shifting of taxes is as follows:
The process of transferring the burden of the
tax from one person to another is called tax shifting. Hence, when the burden
of the tax is passed on to other persons by the tax payers, such as sales tax,
it is known as shifting of taxation. As a matter of fact, every tax payer tries
to shift the burden of the tax on to the shoulders of the other persons. In
case, he succeeds, it is called shifting of taxation. On the contrary, the
incidence of tax falls upon the person who cannot shift it further but actually
bears it.
(iii) Distinction
between the incidence and effects of a tax is as follows:
The tax incidence means the final money burden
of a tax. While studying incidence, we try to find out where actually the money
burden of the tax falls. However, the term ‘effects of tax’ is used in a wider
sense. Whenever any tax is levied, it produces several other effects, besides
its money burden. For example, when excise duty is levied on tea, its money
burden no doubt falls on the consumer, but besides that, the excise duty on tea
also produces other effects. It may lead to the reduction in the consumption
and production of tea besides cutting down the profits of the tea companies. It
also includes all the economic and non-economic problems which arise consequent
upon the imposition of the excise duty. According to Dalton, the incidence of a
tea is the direct money burden whereas the effect of a tea is the indirect
money burden of a tax.
Taxable capacity of a country
Taxable capacity refers to the maximum
capacity that a country can contribute by way of taxation both in the ordinary
and extraordinary circumstances. It represents maximum limit to which the
government can tax the people of the country. If the government exceeds this
limit, it shall result in over taxation, which, besides being injurious to the
long-term interests of the community, may pose a serious threat, to the
political stability of the country concerned. The concept of taxable capacity,
thus, indicates the limit to which the government can tax the citizens.
Taxation Inquiry Commission defined it as,
Taxation capacity of different sections of the community may be said to refer
to the degree of taxation, broadly speaking, beyond which productive effort and
efficiency as a whole begin to suffer. The concept of taxable capacity has been
interpreted by the economists in the following two senses: (i) the absolute
taxable capacity of one single community, and (ii) the relative taxable capacity
of two or more communities.
1.
Absolute
Taxable Capacity: Absolute taxable capacity refers to the
maximum amount of taxation that can be collected from a community without
causing any unpleasant effects. If the operation of a tax system causes
unpleasant effects, the absolute taxable capacity can be said to have exceeded.
According to Josiah Stamp, “the absolute taxable capacity of a country is
represented by the difference between total production and total consumption.”
In other words of Fraser, “When the tax-payers are compelled to lend money from
the banks we should think, the limit of taxable capacity has reached.” In this
case, the tax payers are forced to borrow money from their banks so as to pay
tax dues.
2.
Relative
Taxable Capacity: The relative taxable capacity refers to the
taxable capacity of two or more communities/countries. It is the proportion in
which two or more communities/countries can contribute in the form of taxes in
order to meet some common expenditure. In other words, the relative taxable
capacity is the capacity of the community to contribute some common expenditure
in relation to the capacities of other communities. Thus, if two separate
communities are required to meet some common expenditure, it should be in
proportion to their relative taxable capacities. This principle is commonly
applied in a federal system of government in which different states are
expected to contribute to the common expenditure of the country.
Factors
Determining/Affecting/Influencing Taxable Capacity
The taxable capacity of a
country/community/nation depends on the factors given below:
a) Size of National Income: The
taxable capacity of a country depends upon the size of national income and the
size of national depends upon its natural resources and other resources and
their proper utilization. The higher the size of the national income of a
country, the greater is the taxable capacity of that country. The richer a
community, the higher is the capacity to pay taxes.
b) Size and Growth of Population: The size
and growth of population is also one of the important factors determining
taxable capacity. With a given volume of income of a country, the taxable
capacity is indirectly proportional to the size of its population, i.e. the
larger the population, the lower will be the taxable capacity. Again, if the
growth rate of national income is lower than the population, per capita income
will be reduced and vice versa.
c) Stage of Economic Development: The stage
of economic development also determines taxable capacity. Generally, there is a
positive correlation between the fate of economic development and the taxable
capacity of the economy. Ordinarily, the taxable capacity in industrially
advanced countries is higher than that of the backward and underdeveloped
countries.
d) Distribution of Income and Wealth: The
distribution of income and wealth also influences the taxable capacity of the
people. The greater the inequality in the distribution of income and wealth in
a country, the greater is the taxable capacity. Since a richer community can
pay a higher percentage of taxation, so also a system of distribution which
leads to concentration of income and wealth in the hands of a few may yield a
higher volume of tax revenue and the one which brings about more or less equal
distribution of income and wealth.
e) Nature or Pattern of Taxation System: The
taxable capacity also depends on the nature or pattern of taxation system in a
country. If the taxation system of a country has been devised on a scientific
basis, a well thought out mixture of taxation, the taxable capacity shall be
inevitably high. The tax levies by the government under scientific system will
satisfy the canons of taxation, i.e. canons of certainty, simplicity, equity,
convenience etc. Hence, the taxable capacity shall automatically be high.
f) Nature or Pattern of Public Expenditure: The
nature or pattern of public expenditure also influences the taxable capacity.
If the government incurs a major portion of its expenditure on encouraging
production and increasing the level of efficiency of workers, this will raise
the taxable capacity of the country.
g) Nature of the Government: The
taxable capacity is also influenced by the nature of the government. A
democratically elected government by winning public sympathy and cooperation is
in a position to raise more revenue from the people.
h) Standard of Living of the People: Another,
factor on which taxable capacity depends is the standard of living of the people.
If the standard of living of the people is high, their production power shall
also be high. Hence, their income shall be high and consequently, their
capacity to pay taxes will also increase in the same proportion.
i)
Psychology
of the Tax Payers: The taxable capacity of a country is also
influenced by the psychology of the tax payers. In developed and developing
countries when the people are satisfied that the government is spending the tax
revenue on development activities and for the betterment of whole nation, the
taxable capacity naturally goes up. In such a situation, the government can
collect more and more revenue by way of taxation.
j)
Stability
of Income: The stability of national income also influences the taxable
capacity of the country. For example, the national income in developed
countries like the U.S.A , U.K. Japan, Germany etc. is generally stable in the
sense that there are no violent fluctuations in the national income of such
countries. But in countries like India, Pakistan, Bangladesh, etc. there is
lack of stability in national income. The taxable capacity in such countries is
generally low.
k) Political Conditions: Political
conditions are another important factor which determines the taxable capacity
of a country. Stable political conditions and successful planed economic
development create confidence in the minds of tax payers. They feel that
whatever is taken out from their pockets has been properly utilized for the
welfare of the community as a whole. This encourages the tax payers to fulfill
their tax obligations in time. On the contrary, if political conditions are
instable and there is no planned economic development and the rich are becoming
richer and the poor getting poorer, this may shatter the faith of the tax payer
and community as a whole in the government resulting in tax arrears, tax
evasion and the general disorder in the country.
l)
Other
Factors: Besides the above-mentioned factors, fiscal, monetary and income
policies of the government also affect the taxable capacity. For example,
favourable tax balance of a country increase its taxable capacity.
State
whether India has reached the limit of taxable capacity
India has not reached the limit of taxable
capacity on account of the following reasons:
1) In India
most of the public expenditure is being incurred on development programmes.
Since development programmes increase prosperity, thereby taxable capacity also
increases.
2) National
income is directly related with taxable capacity. Since national income is
increasing in India, taxable capacity is also increasing.
3) Economic
inequality is reducing on account of planned economic development in India. Hence
taxable capacity is increasing in India.
4) On account
of rapid increase in family development programmes in India during the last 5
years, the rate of population growth is less as compared to increase in
production. The standard of living of the people has risen leading to increase
in taxable capacity.
5) Monetary
economy has replaced barter system in India. Further emphasis is being given to
rapid industrialization and thereby the taxable capacity has also increased in
India.
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Also Read following notes:
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Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
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Classification of taxes
Different economics have classified taxes in different ways. The following classifications are commonly found in the modern tax system:
1. Direct and Indirect Taxes
2. Proportional, Progressive, Regressive and Degressive Taxes
3. Specific and Ad Valorem Duties/Taxes
4. Single and Multiple Taxes
1.
Direct and Indirect Taxes
a) Direct taxes: Direct taxes are those which are paid directly to the government by the person to whom taxes are levied. These taxes are charged on incomes and profits. Burden of direct taxes are borne by the person to whom it is levied. He cannot transfer the burden of tax to some other parties. Example of direct taxes: income tax.
Merits
of Direct Taxes
1. Economy: Direct taxes are economical in the sense that the cost of collecting these taxes for the government is relatively low as these taxes are usually collected at source.
2. Equity: Direct taxes can be determined according to the ability to pay and the minimum aggregate sacrifice i.e. it is based on justice and equity. These taxes fall more heavily on the richer persons than on the poor.
3. Reduction in inequality: As direct taxes are progressive in nature, the persons belonging to higher income groups are imposed higher rate of taxation. On the other hand, the low income groups are ever exempted of some taxes. In this manner, it removes the inequality among sections of the society to a greater extent.
4. Certainty: Direct taxes also satisfy the canon of certainty because of its certain effects on the tax-payer. The government collects certain amount through direct taxes. Thus, it enables the public authority to calculate the yield of taxation and hence, plan outlay can be well prepared with great certainty.
5. Elasticity: Direct taxes also satisfy the cannon of elasticity because the income from these taxes can be increased by increasing the rate of taxation in an appropriate way in the hour of crisis.
6. Educative Value: Direct taxes have also the educative value among the common masses. People are aware about the amount collected from them and can check the wastage in public expenditure.
Demerits
of Direct Taxes
1. Inconvenience: The main drawback of the direct taxes is inconvenience because it required numerous accounting and other formalities to be observed. Sometimes, the tax-payers have to pay a large amount taxation in lump sum which causes inconvenience to the tax payers.
2. Unpopular: These taxes are directly imposed on an individual. So it appears quite painful to the tax-payers. This type of taxation is unpopular among the tax-payers and they resist it.
3. Possibility of Evasion: A direct tax is calculated on the basis of honesty of tax-payers. So, there is always a possibility of tax evasion.
4. Narrow in Scope: Generally, direct tax is levied only on certain group of persons which restricts to raise the civic consciousness among all the people of the society. In this way, its applicability is limited.
5. Not Suitable to underdeveloped economies: Direct tax is not much suitable to underdeveloped economies or backward economies as most of the people are illiterate and do not understand the spirit of such a tax.
6. Obstacle to capital formation: It is claimed that if the rate of direct tax is heavy, then it adversely affects the people’s desire, ability to work, save and investment. Therefore, it hampers the growth of capital formation.
b) Indirect Taxes: Indirect taxes are those which are imposed on all the goods and services, and not on incomes and profits. Such taxes are collected by the sellers or service provider from their customers. Since consumers are not paying taxes directly to the government, that is why it is called indirect taxes. Example of indirect taxes: Goods and services tax.
Merits
of Indirect Taxes
1. Convenience: The indirect taxes are less inconvenient than direct taxes. Indirect taxes are paid in small installments instead of lump-sum. They are, generally, included in the price of the commodity.
2. Elastic: Indirect taxes can be elastic i.e. the revenue from them can be increased whenever the government may desire to do so provided that these taxes are imposed on those articles for which the demand is inelastic.
3. No Possibility of Evasion: It is impossible for an individual to evade the payment of indirect taxes because they are already included in the price of the commodity. Thus, there is very little possibility for the evasion of such taxes.
4. Higher Production and Investment: Indirect taxation serves as a powerful tool in moulding the production and investment activities in an economy. Because the government can shift the production and investment from lower priority industries to higher priority industries by imposing higher rate of taxation on low priority products and giving relief to high priority products.
5. Social Welfare: Heavy indirect taxation on articles like wine, opium etc. serves a great social purpose by curtailing the consumption of such harmful commodities which is in the interest of the commodity as a whole.
6. Suitable to Developing Economies: Indirect taxes are most suitable to developing countries as there are large numbers of small producers who are illiterate and incapable to maintain proper accounts. Therefore, they pay in the shape of higher prices of the commodities.
7. Easy to collect: Indirect taxes are easy to collect from every member of the community. Generally, they are added in the price of the goods and every individual who is liable to purchase the commodity pays for it. Thus, it is easy to collect at the behest of the public authority.
Demerits
of Indirect Taxes
1. Regressive in Nature: Indirect taxes are generally regressive in nature because they fall on all persons indiscriminately, irrespective of their ability to pay. The poor fellows feel heavier burden than rich people, when mass consumption goods are heavily taxed by the government.
2. Uncertainty: The revenue collected by the government is very difficult to anticipate. As soon as the commodity is taxed, the market price rises which results in the fall in demand depending upon elasticity of the demand. So, it is quite difficult to anticipate the fall in demand with the imposition of tax.
3. No Civic Consciousness: As indirect tax are levied on the commodities, the consumer does not fell the burden of tax which makes him less conscious about the public expenditure system.
4. Discourage Savings: Indirect taxes discourage savings because these taxes are included in the price and, therefore, people have to spend more on the purchase of the goods. On the other hand, government promotes saving to avoid the indirect taxes.
5. More Uneconomical: Indirect taxes are uneconomical as they involve more cost of collection than actual amount of the taxes. In most of the cases, traders charge more prices than the actually tax levied by the public authority.
6. Inequitable: Another weakness of indirect taxes is that these are inequitable and unfair because poor section of the society has to pay more than the risk.
7. No Direct Link with the Government: Indirect tax being invisible loses direct link between the tax payers and the public authority.
2.
Proportional, Progressive, Regressive and Degressive Taxes
The methods of taxation may be proportional, progressive, regressive and Degressive. A tax system may be composed of different kinds of taxes, such as, proportional, progressive, regressive or Degressive. They may be summarized as under:
a) Proportional Taxes: If a tax on all incomes is levied at the same rate, it is called proportional tax. A schedule of proportional tax rates is one in which the rates of taxation remain constant as the tax base changes. The amount of tax is calculated by multiplying the tax base with the tax rate. This type of taxation is quite simple and one can understand it without difficulty.
Merits
of Proportional Taxation
1. Simple and Uniform: Proportional tax system is simple and uniformly applicable. The tax can be administered relatively easily. Since the simple and uniformly applicable. The tax can be administered relatively easily. Since the tax rate is uniform, there is no problem of computing the tax liability for different individuals. Since everyone pays the same proportion of his income the system has a popular appeal and the revenues can be raised with minimum opposition from the tax payers.
2. Free from Harmful Effects: Proportional tax is free from the harmful effects like disincentive to saving and productivity that are associated with progressive taxation when imposed steeply. If the government follows stringent communistic ideas, the richer sections may be very steeply taxed under progressive system. This needs not usually occur to a proportional system.
3. Easy to Calculate: Proportional taxes are levied at certain proportion of the income and the rate of tax does not vary. Therefore, they are easy to calculate.
4. Equality of Sacrifice: Proportional taxes are sometimes justified on the ground that the real burden of taxes must be equal to the money burden. If this principle is accepted, then the proportional taxes can be justified.
5. Certain: Such taxes enjoy the benefit of certainty. Both the tax payer and the state can know the amount of the tax.
Demerits
of Proportional Taxation
1. Not Equitable: Proportional taxes are unjust as the burden is heavier on poor sections. They have been justified on the wrong notion that the real burden of a tax is equal to its money burden. The fact, however, is that real burden is heavier on small income groups.
2. Less Elastic: Proportional taxes are less elastic as compared to progressive taxes. The taxes cannot increase beyond a certain limit because of low taxation capacity of the poor people. Thus it is not easy for the state to increase its revenue through such taxes.
3. Adverse Effect on Distribution of Wealth: Revenue is not the only motive of Tax. The idea that taxes are only for revenue only has long been discarded. The weapon of taxation is increasingly used to promote social justice. It is in this field that proportional taxes miserably fail. They fail to narrow down the inequalities in the distribution of wealth.
4. Lack of Elasticity: Proportional tax fails to follow the rule of elasticity. As a result, Government is unable to increase its revenue.
5. Not According to Ability to Pay: it is not according to ability to pay of the individual. Low income groups feel heavy burden of taxation. The marginal utility of money decreases rapidly with the increase in income. So, the rich income group people have negligible burden.
b) Progressive Tax: A tax, the rate of which increases with every increase in income is called progressive tax. A schedule of progressive tax rate is one in which the rate of taxation increases as the tax base increases. In India, we have progressive tax rate system.
Merits
of Progressive Taxation
1. Based on the Principle of Equity: Progressive tax rates increase with the increase in income group as the higher income group people have high ability to pay because of rapid fall in the marginal utility of money with the increase in income.
2. Powerful Tool for Reducing Inequality: Progressive taxation is a powerful tool for reducing the inequalities of income because the rich people are bound to pay more taxes.
3. More Elastic: The progressive tax system is more elastic because the state can change the rate of taxation during any time (like war, famines or drought etc.) for collection of more funds and a minor change in the rate of taxation in the higher income group can bring substantial increase in the income.
4. Economical: Progressive taxes can be justified on the ground that they are more economical as the cost of collection does not rise with the rates of taxes.
5. Based on Social Justice: This type of tax is also advocated from the socialistic pattern of society. It is powerful instrument in narrowing down the gap between the rich and the poor sections of the society.
6. More Productive: It is more suitable because the government revenue automatically increases with the increase in economic activities.
7. Based on Modern Social Ethics: Progressive tax is also justified on the ground of modern social ethics as rich should contribute more than the poor. It has proved its worth through revenue productivity, social usefulness and fair justice.
8.
Automatic
increase in Revenue: Progressive taxes lead to an automatic increase in
public income.
Demerits of Progressive Taxation System
1. Difficult to Understand: The progressive tax system is very difficult to understand as it can have infinite number of progression and one has to take the help of an expert in evaluation and calculation of the tax money to be paid.
2. Difficult to Measure Utility: The marginal utility of an individual cannot be measured easily because the mental and psychological satisfaction varies from individual to individual. All human beings have different mentality and law of marginal utility cannot be applied universally.
3. Retards Capital Formation: The degree of progressive taxation has an important bearing in the process of saving and capital formation in an economy.
4. Scope of Tax Evasion: In the progressive tax, there is a large scope of evasion of tax. There may be false declaration of the income just to save from the heavy taxation. Here the motives for evasion is stronger and the means of prevention less effective than in the case of proportional tax.
5. Breeds Corruption: Generally, it is argued that progressive taxation breeds corruption in public life. This depends upon a number of factors such as administrative efficiency, social consciousness and purpose of financial operations etc.
6. Wrong Assumption: It is based on wrong assumption of marginal utility of money which is less to a rich person as compared to a poor person. But satisfaction is a mental or psychological phenomena.
c) Regressive Tax: In regressive taxation, the larger the income of tax-payer, the smaller is the proportion that he contributes. A schedule of regressive tax rate is one in which the rate of taxation decreases as the base increases.
d) Degressive Tax: A Degressive tax is one on which tax is progressive up to a certain limit, after that it is proportional, i.e., charged at flat rate.
Difference between Progressive, Regressive and Proportional tax system
|
Basis |
Progressive |
Regressive |
Proportional |
|
Meaning |
A tax, the rate of which
increases with every increase in income is called progressive tax. |
In regressive taxation, the
larger the income of tax-payer, the smaller is the proportion that he
contributes. |
If a tax on all incomes is levied
at the same rate, it is called proportional tax. |
|
Assessment |
Tax is charged on income. |
Tax is charges on assets
purchased. |
Tax is charged on income. |
|
Type of tax |
It includes direct taxes. |
It includes indirect taxes. |
It includes direct taxes. |
|
Benefits |
Low income group people are
benefited. |
High income group people are benefited. |
High income group people are
benefited. |
|
Ability to pay |
Payer’s ability to pay is
considered. |
Payer’s ability to pay does not
matters. |
Payer’s ability to pay does not
matters. |
|
Revenue |
It generates more revenue to the
government. |
It generates maximum revenue to
the government. |
It generates less revenue as
compared to others. |
|
Equality |
It leads to equality to
sacrifice. |
It does not lead to equality to
sacrifice. |
It does lead to equality to
sacrifice. |
3.
Specific and Ad Valorem Duties/Taxes
a) Specific Tax: When a tax is imposed on a
commodity according to its weight, size or measurement, it is called a specific
tax. For example, when the excise duty is imposed on sugar on the basis of its
weight or the cloth is taxed according to its length, it is known as a specific
tax. It is easy to levy and more convenient to collect because it is collected
either according to the weight of the commodity or the size of the unit of the
commodity.
b) Ad Valorem Tax: When the tax is imposed on
a commodity according to its value it is called ad valorem tax. Whatever may be
the size or weight of the unit of the commodity, the tax is charged according
to its value. The main advantage of ad valorem tax is that it imposes a greater
burden on the richer section of the society.
4.
Single and Multiple Taxes
a) Single Tax: A single tax means only one kind of tax. It implies a tax on one thing, that is, on one class of things or on one class of people. In this case, there is one tax which constitutes the source of public revenue. Such a tax is collected not only once but regularly every month or every year, at intervals of shorter or longer duration.
Advantages
of Single Tax
1. Single tax is a very simple form of taxation which simplifies the work of the government.
2. It is the less costly as less amount is spent to collect the revenue.
3. It does not discriminate against any particular work or industry.
4. It is based on social justice.
5. It is economical on administrative basis.
Disadvantages
of Single Tax
1. It is the most unsatisfactory and unfair distribution on the burden of taxation.
2. It is also opposed on the ground of equity as it does not satisfy the canon of ability of the tax-payer.
3. It does not produce adequate resources to the government.
4. It is not much useful in the period of emergency or during crisis period.
5. It lacks elasticity.
6. There is more possibility of tax evasion.
b) Multiple Tax: A multiple tax refers to the tax system in which there is the diversity of taxation, i.e., various types of taxes are levied. Modern economists have laid emphasis on the diversity of taxation. Multiple tax system simply implies that there should be different types of taxes so that everybody may be called upon to contribute something towards the state revenue. Hence, a multiple tax system is generally preferred to a single tax system. However, too great a multiplicity would be undesirable because it would involve a large cost of collection.
Advantages
of Multiple Taxation
1. In reduces discrimination and inequalities of income and wealth can be reduced with the multiple tax system.
2. It enhances the income of the government to a large extent.
3. This is more efficient and suitable form to check and control the tendencies of tax evasion which are faced frequently in a developing country.
4. It is based on the principle of equity.
5. Multiple taxation is more flexible than the single tax system.
Disadvantages
of Multiple Taxation
1. It is more complicated than single taxation.
2. It is not so simple which common man may understand.
3. It checks productive process of the economy.
4. It is not based on the principle of ability to pay.
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