Taxation

CONTENTS

            (1)        Form of tax

            (2)        Advantages and disadvantages of direct and indirect tax

            (3)        Economic effects of taxes

            (4)        Incidence of taxation

(5)        Objectives of taxation

FORMS OF TAX

Taxes are divided into broad categories namely direct taxes and indirect taxes

(i)     Direct tax: This is a tax collected from individuals and profits of companies. The burden of direct tax is borne by the payer.

Examples of direct taxes are (a) income tax (b) Company tax (c) Capital gain tax (d) Poll tax etc.

ADVANTAGES OF DIRECT TAXES

1.         They are progressive in nature

2.         The incidence of direct tax is easy to ascertain

3.         They are easy to calculate

4.         Payers find them convenient to pay

5.         Some specific group of people or business could be granted exemption from payment of direct tax.

DISADVANTAGES OF DIRECT TAXES

1.         They discourage savings

2.         They discourage investments

3.         They are difficult to assess (determined with accuracy) eg company tax.

4.         Cases of tax evasion is high (frequent)

5.         They discourage hard work

6.         It may result to squabbles between taxpayers and tax officials

(ii)        Indirect Tax: This is a tax levied on goods and services. They are initially paid by either the manufacturer or importer of the goods who, as far as possible shifts the burden to the consumers in form of high prices. Examples of indirect taxes are customs duties (import duty and export duty) excise duty, purchase tax etc.

ADVANTAGES OF INDIRECT TAXES

a.         Their collection is less difficult

b.         They cause less squabbles

c.         It yields more revenue to the government than direct taxes.

d.         They are not easy to evade

e.         The burden is shared among all sections of the society.

DISADVANTAGES OF INDIRECT TAXES

1.         It causes inflation i.e. increases in the prices of goods.

2.         It may cause scarcity of goods

3.         They are unreliable sources of revenue

4.         Indirect taxes are regressive in nature

5.         They are non-discriminatory i.e. some group of people cannot be granted exemption from paying.

6.         They restrict free trade between different countries.

DIFFERENCE BETWEEN SPECIFIC TAX AND AD VALOREM TAX.

This reflects the different methods of calculating custom duties.

In Specific Tax, the amount of tax to be paid depends on the quality of goods bought so that the greater the quality of goods bought the greater the tax to be paid.

Ad Valorem Tax: The amount of tax to be paid depends on the value or quality of the commodity. This value or quality is measured in terms of the price of the commodity. This means that goods which have higher prices are supposed to have higher values and are therefore taxed more heavily than goods whose values and thus prices are lower.

ECONOMIC EFFECTS OF DIRECT TAXES

1. Direct taxes lead to a reduction in disposable income and consequently a reduction in consumption.
2. It discourages savings
3. It discourages hard work
4. It discourages investments and this would, in turn cause unemployment.
5. It leads to a redistribution of wealth
6. It reduces capital available for a company in form of retained profits.

ECONOMICS EFFECTS OF INDIRECT TAXES

1. It can lead to inflation
2. It encourages smuggling
3. It reduces production e.g. excise duties thereby causing scarcity of goods.
4. It discourages investment
5. It can lead to changes in the consumption pattern i.e. it alters the demand and supply of goods.

EVALUATION QUESTIONS

1.         Define the term – formal incidence of tax

2.         Shoe with the aid of a diagram, who bears the incidence of tax of a commodity having inelastic demand.

WEEKEDND ASSIGNMENT

1.         A tax on a commodity whose demand is perfectly inelastic will fall heavily on the (A) Consumer (B) manufacturers (C) wholesalers (D) retailers.

2.         Government revenue will increase if tax is imposed on a good whose demand is (A) elastic  (B) inelastic  (C) unitary elastic  (D) perfectly elastic.

3.         Which of the following is an indirect tax (A) income tax (B) company tax (C) Profit tax (D) Sales tax.

4.         A tax whose rate increases as income increases is (A) an indirect tax (B) a progressive tax (C) a regressive tax  (D) a proportional tax.

5.         The largest part of the revenue of a country is derived from (A) direct taxation  (B) indirect taxation  (C) excise duties (D) company taxes.

THEORY

1.         What is an indirect tax

2.         State three economic effects of taxation.