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A tax is a compulsory payment by individuals and institutions to the government. The government has no obligation to provide services directly to the tax-payer. However, the government use taxpayers’ money to provide public goods e.g. security, education, health services etc which benefit all the citizens.
(i) To raise revenue needed by the government to finance the provision of public goods.
These are the characteristics of a good tax system.
(i) Equity: A good tax system must be fair to all the tax payers i.e. equal tax burden on the rich and the poor .Tax should be based on one’s ability to pay i.e those with high income should pay more. People with the same income should pay the same amount of tax.
(ii) Convenience: Method of paying tax should be easy and convenient to the tax payer. For example, tax should be paid at the times when the taxpayers have the money like the payment of PAYE through the check-off system and VAT at the time of purchase. Such method is also convenient to the government as far as tax collection is concerned.
(iii) Certainty: A tax payer should know the exact amount of tax and the exact time he/she should pay. The government must be certain of the amount of tax it should collect in a given period.
(iv) Economy: A good tax system should ensure that the amount of tax collected is much higher than the administrative cost incurred to collect this tax.
(v) Flexibility: A good tax system is the one that can be easily adjusted so as to accommodate changing economic conditions e.g it should be easy to change the rate of tax without distorting the tax structure.
(i) Proportional taxes – tax is levied at the same rate(constant) at all levels of income.For example, the first shs.8,000 of salary is levied a tax of 10%,the next shs.8,000 of the same salary is levied a tax of 10%, the next shs.8,000 of the same salary is levied a tax of 10% and so on.
(ii) Progressive taxes: The rate of tax increases with the increase in the level of income e.g the PAYE system .For example ,the first shs.8,000 of your salary is levied a tax of 10%,the next shs.8,000 of the same salary is levied a tax of 15% and so on.
(iii) Regressive: The poor makes a greater sacrifice than the rich i.e the tax take a higher proportion of the poor person’s income than that of a rich person’s income e.g.the V.A.T. is charged at a uniform rate of 16% to both the poor and the rich.
(i) Pay as you earn levied on salaried workers (P.A.Y.E.)
(ii) Corporation tax where a company pays tax based on its net profit.
(iii) Wealth tax – tax imposed on accumulated savings or physical properties e.g. land, building etc.
(iv) Capital gains tax is the tax levied on the transfer of property from one person to another e.g. if you buy a piece of land you must pay stamp duty because the ownership of land has moved from the seller to you.
2. Indirect taxes: They are called indirect because the person who initially pay the tax may pass on either part or all of the tax burden to another person. These taxes are based on consumption or expenditure: Examples:-
(i) Sales tax e.g. the oil company pay sales tax for every litre of petrol it sell e.g. 1shs. per litre to the government. The company recovers this tax from the motorist by charging high fuel pump price.
(ii) Excise duty: The B.A.T. Company pay excise duty to the government because of manufacturing cigarettes locally. The company recovers this tax by charging high prices to the cigarette smokers.
(iii) Import duties – Paid on imported goods. The importer pays the duty at the port but later on transfer this tax burden to the person who buy the imported commodity.
(iv) Export duty
Excise Tax burden
Impact of tax Incidence of tax i.e.
is on BAT The person to bear the burden
is the smoker.
(Initial burden) (Final tax burden)
Direct tax describes a tax where the impact of tax and incidence of tax is on the same person.
Indirect tax describes a tax where the impact of tax is on one person and the incidence of tax is on another person.