Question

Explain any four (4) key functions of taxation in the Ghanaian Economy

Answer 1

Tax can be defined as “a compulsory contribution to state revenue, levied by the government on personal income and business profits or added to the cost of some goods, services, and transactions. ” (Electronic Concise Oxford English Dictionary, 2010). Tax regimes vary from country to country but are an integral part of most governments in industrialized countries (Carnell, 2010).

There are two broad classification of tax, these are (A Tax system for New Zealand’s Future, 2010):-

Revenue Tax: – raise revenue for government spending.

Corrective Tax: -these have specific purposes such as promoting or discouraging certain behavior.

Below is the depiction of circular flow of income and the points where taxation is collected.

Overseas Sector

Producer

Investment

BANKS7

Government

Spending

Taxation

Net Export

Savings

Consumer

Spending

HOUSEHOLDS

GOVERNMENT SECTOR

FIRMS

Taxation

Transfers

Factor

Income

Disposable

Income

FIGURE 1: CIRCULAR FLOW OF INCOME HIGHLIGHTING THE TAX POINTS

Source: Faculty of Business Studies, 2010

Taxation has a key role in a modern economy. Listed below are the ways in which governments can use taxation in a modern economy:-

Revenue generation: – Taxation is used by the government to raise revenues for its operations, infrastructure, welfare, education defense (Carnell, 2010).

Behavior Discouragement: – Also referred to as social engineering, the purpose of this is to discourage people from antisocial behavior and is often done heavily taxing the commodity there by increasing its price (Carnell, 2010).

Reducing Inequality: – Tax money is used to serve the weaker sections of the society through the welfare programs (Carnell, 2010).

Resource Redistribution: – Can be used to transfer resources form one section of society to another section of the society (Carnell, 2010).

Protecting local Industry: – Local industries are normally protected by the government through the use of heavy import tariffs. This makes the imported goods more expensive then the local goods and thereby encouraging the production of local goods (Carnell, 2010).

Taxation is the key to promoting sustainable growth and poverty reduction. It provides developing countries with a stable and predictable fiscal environment to promote growth and to finance their social and physical infrastructural needs. Combined with economic growth, it reduces long term reliance on aid and ensures good governance by promoting the accountability of governments to their citizens (Romer & Romer, 2010). According to Ilyas and Siddiqi (2008), availability and mobilization of revenue is the fundamental factor with which an economy is managed and run. Tax revenue is a core instrument in the hands of the government to fulfill expenditures and it helps in acquiring sustained growth targets. The nature of taxes can help predict a growth pattern. The overall tax burden is significant in explaining variations in economic growth. The role of taxation in influencing economic growth is not only a major concern of the economic policy makers, tax specialists and administrators but has long been of interest to academics. Tax policy is used for the economic and social purposes like allocation of resources through increasing internal savings, increasing economic growth of the country, providing price stability and controlling the production and consumption level indirectly. Economists have long been interested in factors that cause different countries to grow at different rates and achieve different levels of wealth. However, many believe that tax revenue is one of the most significant factors that contribute to a country’s growth (Myles, 2000). The relationship between taxation and economic growth can be negative, positive or neutral depending on how important the role of tax revenue is, as an economic resource.

Combining data from all these sources, the International Centre for Tax and Development (ICTD) produces the ICTD Government Revenue Dataset.

The data produced by the IMF, the World Bank, the OECD and CEPAL often covers different countries at different points in time; and for those years and countries in which estimates overlap, there are significant inconsistencies.

The inconsistencies between sources are often due to differences in methodological choices – such as differences in the classification of social security contributions, or the omission of data from taxes collected by local governments. And in addition to methodological differences, sources also seem to differ in other substantial non-systematic ways. A very detailed account of data quality differences can be found in Prichard et al. (2014).32

The chart shows an example of data discrepancies in tax revenues for Ghana. The different series correspond to different sources: the blue line denotes estimates using IMF Article IV reports, the orange line denotes estimates from the IMF Government Finance Statistics, the yellow line denotes data from IMF Country Reports, and the green line denotes estimates from the World Bank World Development Indicators.

Considering the above data limitations, the ICTD developed the new Government Revenue Dataset, merging and prioritizing sources under a standard classification system. Prichard et al. (2014)34 provide a detailed account of the data limitations identified by the ICTD, and how they tried to address them in the new ICTD Government Revenue Dataset.

Above were some arear where Taxation works as the important part to play in Ghanna's economy.