Concept of taxation

1. To raise government revenue. The main purpose of taxation is to raise revenue. The main source of government revenue is taxation. Tax help to cover a daily revenue expenditure e.g. education, defense, health.
2. Reduce income inequalities. Through PAYE (Pay as you earn), where the high income earners reduce the gap between rich and poor.
3. To increase economic activities. Money collected from taxation can be utilized for economic and social development e.g. schools, hospitals etc.
4. To discourage consumption of harmful commodities. Imposing high tax on commodities such as beers, cigarettes so as to discourage their consumption.
5. To adjust balance of payment deficit. Balance of payment is widened by high importation and less exportation.
6. To adjust inflation Caused by high demand due to the more money in the circulation taxation help to reduce money in circulation.
7. To restrict importation for the purpose of protecting local industries By imposing heavy custom duties, discourage importer for products which are locally produced.

1. Equity. The burden of taxation ought to be distributed owing tax payers according to their ability to pay. Taxes must be proportional to the income of the tax payers it must conform with his ability to pay its desirable to use income tax to ensure on equitable payment of tax for rich and poor rich to pay more and poor to pay his taxes
2. Convenience. Tax should be easy to collect and not easy to evade, the time and manner of collection must be convenient to both the state and the tax payers
3. Certainty. Taxes should not cause any hardship to the taxpayer. A taxpayer should know exactly what he has to pay, the manner of payment and time of payment and there must be no confusion in this regard.
4. Economy. The cost of collection should be low and the state should receive the full amount of the tax paid. The amount collected should afford to meet the cost of administration and collection.
5. Productivity or high yield. A tax should yield the revenue necessary to meet the changing need of the economy, every tax imposed should give greater income to the government.
6. Simplicity. The tax system must be simple to understand by both tax payers and tax collectors since the high tax increases tax evasion.
7. Diversity. There must be different type of taxes so that the burden of these is an different group of society.
8. Elasticity. It should be possible to adjust the rate of a tax to meet changed financial circumstances. It must be possible to increase or decrease the taxes according to the economic situation of the country e.g. during inflation taxes must be increased and vice versa.

Taxes can be classified according to the following groups.

a. According to tax base. A tax base is what are you taxing. The tax base is the taxable income. Under this we have:

1. Income tax e.g. PAYE, corporation tax, development levy
2. Capital tax e.g. property tax, capital gain tax, capital transfer tax
3. Consumption tax e.g. excise duties, VAT, sales tax

b. According to the shift of incidence

1. Direct tax
2. Indirect tax

c. Whether the tax is specific unit or advalorem

1. Unit or specific taxes are levied on the volume of what is to be taxed e.g. excise duties
2. Advalorem tax is levied on the value of the tax base e.g. income tax, VAT

a. Regressive taxes. These increase as income of people increase

b. Proportional taxes. These are constant taxes rate among all tax payers. Regressive taxes. These reduces as tax payers income increases.

Are taxes imposed on incomes of individuals or properties of individuals e.g. PAYE

Advantages of direct taxes

1. Equality. Direct taxes are usually assessed in accordance with a graded scale so that the rate of taxation arises in relation to income. It is progressive.
2. Economical. Cost of collection of direct taxes are comparatively low especially where the employer acts as tax collector, this saves expenses of collection
3. Redistribution of wealth. The direct tax plays significant role in redistribution of incomes.
4. Revenue. The yield from personal taxation is fairly certain and can be calculated reasonably accelerate in advance.
5. Elastic. If the government suddenly stands in need of more revenue in an emergency, direct taxes can well serve the purpose.
6. Knowledge to tax payer. The tax payer generally know exactly how he has to pay.
7. Stimulate spending of money. The interest of the tax payer in the spending of public money is stimulated.

Disadvantages of direct taxes

1. Evasion is possible. The assessors can submit a false return of income and thus evade the tax that is why a direct tax is a tax honesty. Evasion is encouraged more when rates of direct tax rate high
2. Deterrent to work. A high rate of personal taxation may cause people to work less. A progressive rate of tax means that over a certain income people may prefer to have leisure rather than extra earnings because a high proportion later is taken by the government. High rates of personal taxation will discourage the progression of extra goods and services
3. Deterrent to saving. A high rate of personal taxation may reduce consumers ability to save since it leaves them with less money to spend indeed the effect might lead to a reduction in saving by those who are determined to maintain their present level of expenditure
4. Deterrent to enterprise. Corporation tax is a tax on the profits of companies and such a tax may stifle enterprise effort and enterprise may be revitalized and discouraged where rates of direct taxation are highly progressive.
5. It is not flexible. It is not easy to revise a system that is fair for all classes.

These are taxes imposed on goods and services e.g. VAT

Advantages of indirect taxes

Indirect taxes are imposed on goods and services so that impact and incidence are on direct persons

1. Voluntary payment. Payment of indirect taxes is voluntary in the sense that consumer can choose to avoid expenditure on taxed goods and services e.g. if an individual does not pay any tax on these items.
2. Means of reaching the poor. It is same principle that every individual should pay something however little to the state the poor are always exempted from paying direct taxes they can be reached only through indirect taxes.
3. Administration. Indirect taxes offer certain administrative merits, custom and excise duties are paid by importers and manufacturers, wholesalers is tax is collected from wholesalers and retailers. Hence indirect taxes are more difficult to evade and easier to collect than direct
4. Selectivity. Indirect taxes may be used to select to achieve particular aim e.g. they can be used as an instrument of checking the consumption of harmful commodities such as tobacco and alcohol and other intoxicated are highly taxed.
5. It is convenient. The method of payment is convenient, the tax payer does not feel the burden so direct commodity taxes enable foreign visitors who would otherwise be exempt from taxation to be reached.

Disadvantages of indirect taxes

1. Regressive. Indirect taxation is regressive in character they fall more heavily on people with low income than those with high income. The proportion of tax payers income paid in indirect tends to diminish as that income increase.
2. Uncertainty yielding revenue. They are uncertain in yield unless necessaries are taxed. In case of goods with elastic demand, the tax might not bring in much revenue the tax will raise the price and contact the demand when the product is not purchased the question of the tax payment does not raise it is not easy to determine the incidence.
3. Cost of living. An increase in indirect taxes can raise retail prices and hence the cost of living.
4. Uneconomical. Indirect taxes are not economical to the tax payer once he may pay more than the amount actually received by the state each middlemen taking margin may received a cancelled increase.
5. High cost of collection. The real cost of collection of indirect tax may be high. Easy to shift. The indirect tax may be shifted onto those who were not intended to bear it.

1. Disincentive to work.
2. Disincentive to saving.
3. Disincentive to investment.
4. Disincentive of production. Producer will diverge from higher taxed industries to lower taxed industries taxation of some commodities may divert economic resource from high to low rated new industries particularly may be attached to places where the rates are low.
5. Inflationary. Where tax is shifted onto the consumer higher prices may give rise to demands for higher wages loading to higher costs leading to higher prices of other commodities

1. It is compulsory charge payable to the government.
2. Only the government has power to levy taxes.
3. Both citizens and non citizen are liable to pay tax of one kind or another.
4. There is no consideration relation in taxation.
5. Once the tax has been collected the government does not have obligation to account for the way the revenue has been used.
6. The payment of tax is made in monetary terms.
7. The power of taxation is mainly to be used in collecting revenue is the state and not is the accomplishment of other objectives.