Tax: Reasons, Principles, Tax base, Tax rate, Income Tax and Tax collection

CONTENTS

1. Definition
2. Reasons for the imposition of taxes
3. The principles of taxation
4. The concepts of tax base and tax rate
5. Forms (Systems) of income tax
6. Problems associated with tax collection in Nigeria.

A tax is a compulsory payment made by each eligible citizen towards the expenditure of the country. It is a compulsory contribution imposed by a government authority on goods, individuals, corporate bodies (business) without regard to the specific benefits that the taxpayer may receive.

REASON FOR THE IMPOSITION OF TAXES BY THE GOVERNMENT

1. To raise revenue for the government
2. Taxation is used to redistribute income i.e. to lower / reduce the income gap between the rich and the poor.
3. To project infant industries – infant industries are newly formed industries that has to be protected from competition by already established industries.
4. To stop or discourage the importation of dangerous or harmful goods e.g cigarettes
5. Taxation is used as a fiscal device to control the economy i.e. to control inflation, deflation or influence the rate of consumption, investments and savings in the economy
6. To encourage industrialization e.g by tax rebates or tax holidays for industrialists
7. Taxes are also used to promote social services such as social insurance, poor and elderly relief, health insurance etc.

PRINCIPLES OF TAXATION

Adam Smith in his book Wealth of National lays down four canons or attributes of a good tax system. They are

1. Equity: This principles emphasizes that the tax imposed must be in consonance with the tax payer’s ability to pay. In other words, the tax imposed should be in fair proportion to the taxpayer’s income. The progressive tax system reflects this.
2. Certainly: The tax payer must know how much he / she is to pay, in what medium, where, when and how the tax is to be paid.
3. Convenience: The method and time of tax collection should be convenient to the tax payer e.g wage/salary earners at the end of the month, farmers during harvesting period etc.
4. Economy: The cost of collection of taxes should be small relative to the amount collected. It will neither be frugal not prudent to use resources of N10,000 to collect

In addition to the above, the following principles of a good tax system should be noted.

5.         Flexibility: A good tax system should be capable of being changed when conditions and situations warrant such changes.

6.         Neutrality: A good tax system should not be a disincentive to enterprise or productively i.e. it should not interfere unnecessarily with the supply and demand for goods, services and labour.

7.         Simplicity: A good tax system should be simple enough for easy understanding.

8.         Impartiality: There should be no discrimination in the collection of taxes.

9.         Difficult to evade: A good tax system should ensure that tax evasion / tax avoidance are kept at a minimum.

CONCEPT OF TAX BASE AND TAX RATE

The tax base refers to the item of the object which is taxed. i.e.  the amount of the salary wages, income, profits, gains or assets upon which the calculation of tax to be paid is based

The tax rate refers to the percentage that is applied to the tax base in order to calculate the amount of tax payable by the taxpayer.

SYSTEMS OF TAXATION / FORMS OF INCOME TAX

1. Proportional Tax: This is a form of income tax in which the same rate of tax is applied to the respective income of taxpayers. for example if government applies a tax rate of 10% on all taxpayer income, a worker earning N15,000 will pay N1500 tax will pay N6000 as tax.
2. Progressive Tax: In this case, the percentage levied (tax rate) increases with the size of one’s income. A progressive tax takes a larger percentages of income from people with larger income. It reduces inequality of income from people with larger income. It reduces inequality of income distribution eg Pay As You Earn (P.A.Y.E.)
3. Regressive Tax: In this case, the proportion removed as tax from one’s income decreases as the person’s income increases i.e. The higher the income, the lower the rate of tax eg Poll tax, indirect tax etc. A regressive tax aggravate inequality of income distribution

PROBLEMS ASSOCIATED WITH TAX COLLECTION IN NIGERIA

1. Corruption and non challant attitudes of revenue officers / tax collectors.
2. Tax evasion and Tax avoidance
3. Lack of proper accounting records by business enterprises
4. Ignorance / illiteracy / mass poverty of the populace
5. Apathy of tax payers as a result of corruption in high places  
6. Government’s inability to provide essential infrastructure and amenities eg electricity does not encourage people to pay tax.

TAX EVASION AND TAX AVOIDANCE

Tax Evasion refers to an illegal attempt not to pay tax or pay less tax. For instance, someone could make false declarations of income or tax could be dodged completely.

Tax Avoidance refers to the efforts of a tax payer not to pay tax by finding a legal 100phone in the tax system. For example, the taxpayer could discover a part of the tax law that is ambiguous. He can therefore take advantage of this and easily defend himself legally if he does not pay tax or if he pays less tax. Tax avoidance is a legal etc.

REVIEW QUESTIONS

1.         Differentiate between tax avoidance and tax evasion.

2.         Plotting a graph of rate of tax paid (%) on the y-axis and income (#) on the x – axis, show the following on the same graph (a) Progressive Tax (b) Regressive Tax (c) Proportional tax.

READING ASSIGNMENT

1.         Comprehensive Economics for SSS by J.U. Anyaele page 150 – 155.

WEEKEND ASSIGNMENT

1.         A tax system in which all the payers are taxed the same percentage of their incomes is referred to as (a) regressive (b) progressive (c) proportional (d) flexible.

2.         Which of the following is Not a principle of taxation (a) certainty (b) convenience (c) economy (d) security.

3.         Mr Bello’s income is $800 per month while that of Mr Jatau is $1200. if messes Bello and Jatau pay $80 and $120 respectively as taxes, the tax system is (a) Progressive (b) regressive (c) proportional (d) ad – valorem.

4.         Government revenue from the groundnut industry is from (a) licences (b) rents (c) royalties (d) taxes.

5.         A worker earns $80,000 per annum. He / she pays $4,000 as tax. What percentages of his/her income does he/she pay as tax (a) 10% (b) 8% (c) 5% (d) 4%.

THEORY

1.         What is a tax

2.         State three problems associated with tax collection in Nigeria.