Main Functions of Taxation
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Finance government activities
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Finance economic objectives
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Redistribution of national wealth
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Automatic stabiliser
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Finance social objectives
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Promote enterprise
Canons of Taxation by Adam Smith
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Equity
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Certainty
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Convenience
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Economy
Taxation must not Discourage
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Savings
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Work
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Investment
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Progressive Taxation: Taxation increases as income increases
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Regressive Taxation: Taxation takes up more income as income decreases
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Proportional Taxation: Taxation increases as Income increases
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Imposition of Tax: whom the taxation was levied upon
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Effective Incidence of Tax: who actually pays the tax
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Tax avoidance: using tax regulations to reduce ones taxes (legal)
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Tax evasion: making false or no tax returns (illegal)
Direct Taxes: (income)
Advantages
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Equity of taxation
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Convenient
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Economical
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Certain
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Ease of govt. taxation
Disadvantages
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Work and Investment discouraged
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Black Economy encouraged
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Small tax base could be put under pressure
Indirect Taxes: (transactions)
Advantages
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Evasion is more difficult
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No disencentive to work
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Convenient to tax payer
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can change consumtion patterns
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Economical
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Built in stabiliser
Disadvantages
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Increase Inflation
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Regressive
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Revenue not certain
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Burden of collection passed to traders/retailers
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Inequitable
National Debt
The total amount of money outstanding borrowed by a govt.
Reasons:
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Increased Current Budget defficits.
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Self-Liquidising debt
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Social investment.
Positive Consequences
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Improved public services
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Increased spending on infrastucture
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Future economic growth
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Employment
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Self-liquidating debt
Negative Consequences
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Opportunity costs involved
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Increased burden on taxpayers
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Increased annual interest repayments
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Diminished international credit-rating
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Outside Euro stability pact requirements
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Poor government management of economy
- Risk in provision in Public services
- The exchequer balance: the difference between total current and capital expenditure and the income of the government
- The general government balance: the total income minus expenditure of the different areas of government.
- Government current budget: outlines government’s planned income and expenditure for the coming year, eg. Teachers saleries and social welfare as expenditure and V.A.T. and stamp duty as income.
- Government capital budget: outlines expenditure on goods not used over one year, eg. Buildings, schools and roads. This is usually financed by borrowing/sale semi-state body.
- Revenue borrowing: Greater actual taxation over a year, greater than planned for in budget, e.g. level of income tax higher than planned.
- Current budget deficit: Current government expenditure greater than current government revenue
- Exchequer Borrowing Requirement: amount borrowed by government to fund current budget deficit/borrowing for capital purposes
- Public Sector Borrowing Requirement: EBR and semi state/state sponsored bodies and local authority borrowing
