TAXATION AND FISCAL POLICY

BY
RESTER TOGORMEY
 Meaning of Tax

A tax (from the Latin taxo; "rate") is a financial

charge or other levy imposed upon a taxpayer
(an individual or legal entity) by a state or the
functional equivalent of a state such that failure
to pay, or evasion of or resistance to collection,
is punishable by law. Taxes are also imposed by
many administrative divisions. Taxes consist of
direct or indirect taxes and may be paid in
money or as its labour equivalent.
 Meaning of Tax

A fee charged ("levied") by a government on a product, income,

or activity. If tax is levied directly on personal or corporate
income, then it is a direct tax. If tax is levied on the price of a
good or service, then it is called an indirect tax. The purpose of
taxation is to finance government expenditure. One of the most
important uses of taxes is to finance public goods and services,
such as street lighting and street cleaning. Since public goods
and services do not allow a non-payer to be excluded, or allow
exclusion by a consumer, there cannot be a market in the good
or service, and so they need to be provided by the government
or a quasi-government agency, which tend to finance
themselves largely through taxes.
 Meaning of Tax

According to Hugh Dalton, "a tax is a

compulsory contribution imposed by a public
authority, irrespective of the exact amount of
service rendered to the taxpayer in return, and
not imposed as penalty for any legal offence."
Taxation is a systematic process that
includes policy, law and
administration.

It is a compulsory levy imposed on

individuals or firms by an organ of
government for public purposes.
From the definition we can conclude that Tax has
three characteristics. These are Legal, Political and
Social & Economic.

Legal: it requires that the payment be made. It is a

creation of legislature and is imposed by a statute.

Political: it is imposed by an organ of government

Social & Economic: purpose for which the payment

made.
 Adam Smith's Four Main Canons of Taxation

A good tax system is one which is designed on

the basis of an appropriate set of principles
(rules). The tax system should strike a balance
between the interest of the taxpayer and that of
tax authorities. Adam Smith was the first
economist to develop a list of Canons of
Taxation. These canons are still regarded as
characteristics or features of a good tax system
 1. Canon of Equity

The principle aims at providing economic and social justice

to the people. According to this principle, every person
should pay to the government depending upon his ability
to pay. The rich class people should pay higher taxes to the
government, because without the protection of the
government authorities (Police, Defence, etc.) they could
not have earned and enjoyed their income. Adam Smith
argued that the taxes should be proportional to income,
i.e., citizens should pay the taxes in proportion to the
revenue which they respectively enjoy under the
protection of the state.
 2. Canon of Certainty

According to Adam Smith, the tax which an

individual has to pay should be certain, not
arbitrary. The tax payer should know in advance
how much tax he has to pay, at what time he has to
pay the tax, and in what form the tax is to be paid to
the government. In other words, every tax should
satisfy the canon of certainty. At the same time a
good tax system also ensures that the government
is also certain about the amount that will be
collected by way of tax.
 3. Canon of Convenience

The mode and timing of tax payment should be

as far as possible, convenient to the tax payers.
For example, land revenue is collected at time of
harvest income tax is deducted at source.
Convenient tax system will encourage people to
pay tax and will increase tax revenue.
 4. Canon of Economy

This principle states that there should be

economy in tax administration. The cost of tax
collection should be lower than the amount of
tax collected. It may not serve any purpose, if
the taxes imposed are widespread but are
difficult to administer. Therefore, it would make
no sense to impose certain taxes, if it is difficult
to administer.
 ADDITIONAL CANONS OF TAXATION

Activities and functions of the government have

increased significantly since Adam Smith's time.
Governments are expected to maintain economic
stability, full employment, reduce income
inequality & promote growth and development.
Tax system should be such that it meets the
requirements of growing state activities.
Accordingly, modern economists gave following
additional canons of taxation.
 5. Canon of Productivity

It is also known as the canon of fiscal adequacy.

According to this principle, the tax system
should be able to yield enough revenue for the
treasury and the government should have no
need to resort to deficit financing. This is a good
principle to follow in a developing economy.
 6. Canon of Elasticity

According to this canon, every tax imposed by

the government should be elastic in nature. In
other words, the income from tax should be
capable of increasing or decreasing according to
the requirement of the country. For example, if
the government needs more income at time of
crisis, the tax should be capable of yielding more
income through increase in its rate.
 7. Canon of Flexibility

It should be easily possible for the authorities to

revise the tax structure both with respect to its
coverage and rates, to suit the changing
requirements of the economy. With changing
time and conditions the tax system needs to be
changed without much difficulty. The tax system
must be flexible and not rigid.
 8. Canon of Simplicity

The tax system should not be complicated. That

makes it difficult to understand and administer
and results in problems of interpretation and
disputes. In India, the efforts of the government
in recent years have been to make the system
simple.
 9. Canon of Diversity

This principle states that the government should

collect taxes from different sources rather than
concentrating on a single source of tax. It is not
advisable for the government to depend upon a
single source of tax, it may result in inequity to the
certain section of the society; uncertainty for the
government to raise funds. If the tax revenue comes
from diversified source, then any reduction in tax
revenue on account of any one cause is bound to be
small.
 REQUIREMENT OF A GOOD TAX STRUCTURE /
SYSTEM

• The tax structure is a part of economic

organisation of a society and therefore fit in its
overall economic environment. No tax system
that does not satisfy these basic conditions can
be termed a good one.
• However, the state should pursue mainly
following principles in structuring its tax system :-
• The primary aim of the tax should be to raise
revenue for public services.
 REQUIREMENT OF A GOOD TAX STRUCTURE /
SYSTEM

• People should be asked to pay taxes according

to their ability to pay and assessment of their
taxable capacity should be made primarily on
the basis of income and property.
• Tax should not be discriminatory in any aspect
between individuals and also between various
groups.
 FORMS/TYPES OF TAXES

• There are two forms/types of taxes. These are direct

and indirect.
• This distinction is from an administrative point of
view
• Direct-This is paid by a person or an entity on
whom/which it is actually levied
• The impact and incidence/burden falls on the same
person or organisation
• The administering authority is the Domestic Tax
Revenue Division of the Ghana Revenue Authority
• Indirect-Tax is levied on one person and which
is ultimately shifted or passed on to another
• Examples include excise duty, customs duty
and value added tax
• The burden of the tax is on the final consumer
• Indirect tax may be ad valorem (according to
the value) or specific
 FORMS/TYPES OF INDIRECT TAXES

• Ad valorem where the rate of tax is

determined as a percentage of the value of
the goods e.g. wrist watches are 30% ad
valorem
• Specific where the rate of tax is based on a
fixed amount per some physical attribute or a
combination of physical attributes of the
commodity being tax e.g. weight etc.
 THE ROLE OF TAXATION
• Generally, taxation has only been regarded as the
means of revenue mobilization to finance
government expenditure. On the contrary, it
goes beyond the primary aim of generating
revenue for government activities. Government
employs taxation as tool to influence the
direction of the economy through fiscal policy.
Therefore taxation can be used as an instrument
to achieve economic development and growth.
 The following are some economic objectives
that can be achieved through taxation
• Create employment
• Alleviate poverty
• Reallocation of resources
• To control inflation
• To protect infant industries
• To protect the Balance of Payment position
Some social objectives can also be achieved
through taxation
• Redistribution of income to reduce economic
inequality
• Discourage the production and consumption
of harmful good
• Provision of social amenities with revenue
generated
• Checking lifestyle by imposing higher tax on
goods consume by the rich
 THE ROLE OF TAXATION

• Raise revenue to defray the cost of services provided

by the state
• Reduce inequalities arising from the distribution of
wealth
• Restrain certain types of consumption e.g. alcoholic
beverages and tobacco
• Protect indigenous industries; and
• Control certain aspects of the country’s economy
e.g. the balance of payments, employment, savings,
investment and productivity
 SOURCES OF TAXATION
There are two main sources namely primary and
secondary.
PRIMARY SOURCES
• Legislation
• Case law
• Treaties
 SECONDARY SOURCES
• Text Books
• Tax Manuals
• Tax Journals
• Tax Bulletin
• Tax Articles
• Tax Research findings