A tax is a compulsory payment to government by workers, business owners or added to the cost of some goods, services and transactions. It is the compulsory contribution to state revenue levied by government on workers income and business profits or added to the cost of some goods and services and transactions.
Taxation is imposition of compulsory levies on individual or entities by government. Every country imposes tax on its citizens to raise revenue for running the government.
Classes of Taxes
Taxes are classified based on who is paying them. Whoever bears the burden of the tax and to the extent to which the burden can be shifted is taken into consideration when classifying taxes. Taxes are classified as either direct or indirect.
It is usually said that a direct tax is one that cannot be shifted by the taxpayers to someone else, but indirect tax can be shifted. This has resulted in the argument as to the criteria for knowing the difference between direct and indirect taxes as corporate income tax and property tax do not necessarily follow the criteria.
Direct taxes are taxes that are paid directly to the government by the individual or legal entity. These taxes are based on the taxpayers ability to pay as measured by income or net worth. Income taxes are levied on total personal net income of the taxpayer.
They are commonly tailored to suit the person’s ability to pay by considering family status, number of children and age of children and other burdens such as dependants. These taxes rise as income rises. These taxes are levied on the value of his assets minus his liabilities.
Indirect taxes are taxes that are passed on to another individual. Indirect taxes are levied on the production and consumption of goods and services and on transactions. Examples are sales tax, value added taxes (VAT), Taxes on manufacturing, taxes on imported goods etc.
The VAT has largely replaced the income tax; a its on each phase of the production and allocation chain. Some countries place taxes on raw materials and machinery.
Some custom duties are levied on the basis of number, weight, volume etc. Sales tax are levied on the value of goods as measured by the price.
Proportional, Progressive And Regressive Taxes
Taxes are also distinguished by the effect they have on the distribution of income and wealth. A proportional tax in one that imposes the same relative burden on all taxpayers. Here, the tax payable and income grow in equal proportion.
A progressive is characterized by a more than proportional rise in the tax relative to the increase in income. Progressive taxes have the capacity to reduce the inequalities in income distribution.
Regressive tax is characterized by a less than proportional rise in the income. This tax system widens the gap in unequal distribution of income.
It is difficult to classify corporate income taxes and taxes on business as progressive, regressive or proportional because of the uncertainty about the ability of business to shift their tax burden. This problem of not easily determining the tax burden lies on the inability to determine whether a national tax is being considered.
Average income tax rates indicate the fraction of the total income that is paid in taxation. Average income tax rates commonly increase with profits. Income taxation, payroll taxes, sales taxes bring in the greatest amount of tax revenues in modern times.
Features of Tax
1) Tax is imposed by the government: Taxes are imposed by the government of a country to raise revenue. No individual has the right to impose taxes on anybody unless they are empowered to do so by the government.
2) Tax is a legal collection: It is legal. It is supported by law. It is a tool of public finance.
3) Tax is compulsory collection: Due to the legal nature of it, it is binding on every eligible tax payer to pay their taxes.
Objectives Of Taxation
1) Revenue collection: Taxes are used for government revenue generation. Taxation is the greatest revenue source for government worldwide. Revenues collected from taxpayers are used for running the government.
Providing basic amenities like hospitals, roads, bridges are governmental projects carried out with taxes generated within the country.
2) Regulatory objectives: Taxes are used to regulate human spending. Such products as tobacco, wines and spirits, drugs are heavily taxed so that its consumption can be regulated. Taxes are also imposed on imported goods so as to make people patronize home made products.
When such products are heavily taxed, it affects their prices and this makes people buy the locally produced products more. Other lifestyle products are also heavily taxed to regulate their demand. These include automobiles, machinery, boats and yatchs.
3) Development: Taxes are used to develop the country. Revenue for capital projects are generated from taxation. Most modern countries develop the much needed infrastructure using taxes. Infrastructures like roads, bridges, hospitals are built with taxpayer’s money.
Such taxes are also used to build and maintain industries which can employ the people. Taxes are used to fund educational institutions and research centers to develop skills and knowledge to drive the country towards success. See here
4) Reducing Inequalities: Proportional taxation reduces inequalities in the society. People are made to pay a certain percentage of tax proportional to their income. The richer pays more than the poor, and this reduces inequalities. When the government uses these taxes to build public infrastructures everybody enjoys the benefits no matter what percentage of their taxes involved.
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5) Reducing Regional Imbalances: Taxes generated from the richer region of the country is shifted towards developing the poorer region of the country. This reduces regional imbalances. In Nigeria for instance, it is not news that some regions generate more tax than others. The government uses the revenue generated to provide basic amenities for people in the poorer region.
Principles of Taxation
1) Principle of Equality: As emphasized by Adam Smith, the first principle of taxation should be equality. According to this principle, everybody should pay to the government according to his ability to pay. That means, they should be proportional to the income or revenue of the taxpayer. Under this principle, the richer members of the society will pay more taxes than the poor.
2) Principle of Certainty: A good tax system should be based on the principle of certainty, which every individual is bound to pay should be certain. Tax should be constant as the taxpayer’s income is constant.
Nobody should be charged arbitrarily. Most people tend to spend their income even before it comes, so they expect a constant tax deduction so that they could meet up with other obligations.
3) Principle of Convenience: This principle advocates that paying taxes should be easy and not cumbersome. People should not have to stress themselves to pay tax. Government should find better means of getting these taxes instead of putting people into confusion and stress just to pay it.
4) Principle of Economy: The tax collection costs should not be more than the collected. The cost of tax collection should be minimized drastically so that the aim of the exercise should not be wasted.
As much as the government should not put the tax payer into stress, the government should not also waste so much money to collect the taxes. The government should find more economical means of collecting tax.
A tax return is a form filled with a tax authority that reports income, expenses, and other tax information. Tax returns allow taxpayers to calculate the amount of money they pay as taxes, and also help them to keep track of their tax payments.
Types Of Tax
1) Income tax: Are the taxes deducted from the income of tax payers. This means the percentage of the income paid to the government as taxes. Public servants and other government workers have these taxes deducted from their salary monthly.
2) Corporate Tax: Corporations pay taxes to the government. They declare their profits yearly and pay their taxes to government. Corporate taxes are most times paid yearly or quarterly. They have tax identification numbers which they can present for verification of their tax returns. Tax clearance certificates are also issued to them. This certificate must also be provided by whenever the company wants to borrow money from the banks.
3) Property tax: These are paid for properties used for generating income. Properties like commercial houses, commercial transportation services, clubs, hotels, business premises etc. These taxes are sometimes not popular in Nigeria.
A lot of businesses are evading these taxes because they operate from their homes. In recent times, many people now build their own houses and occupy it instead of renting.
4) Sales Tax: These are taxes imposed on business transactions.
Importance Of Taxation
1) Generating resources: Government generates revenue from taxes. These taxes are sometimes administered by the different levels of government as the law permits.
2) Equity and growth: Taxes generated are used for the good of all members of the society. Good hospitals, roads, clean water supply are some of the things government provides using taxpayers money and everybody in the society enjoys the benefits.
3) Behaviour: Government regulates public behavior with taxation. Imported goods are more expensive than the locally produced goods because of the heavy taxes imposed on them in order to force the citizens to patronize home made goods.
Without these measures, people will abandon the local industries and manufacturers and this will have adverse effects on the economy of the country.
4) Social contract: Taxation is a firm of social contract. You expect the government to provide you with basic amenities; therefore, you are expected to pay tax to government.
Benefits Of Paying Taxes
1) Paying taxes gives you the authority to demand good governance and accountability from the government.
2) Paying taxes gives you a sense of patriotism.
3) Paying taxes gives you the freedom to operate your business anywhere without fear.
4) Taxation helps to provide steady finances for running the government.
5) Taxation brings about redistribution of wealth.
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