Question

Assume you are a fresh graduate from UPSA with Public Finance as one of your specializations. You have been employed by the Ministry of Finance in your country. The government of your country is in the process of designing a better tax system in order to maximize revenue for accelerated economic development.

a. Your superior has assigned you the task of assisting in designing the new tax system. Discuss what a good tax system would require and explain the specific economic challenges that affect taxation in your country.

b. Explain two (2) major reasons why the incidence of taxation should be of paramount importance to the Government.

c. Discuss four (4) major recommendations you would offer a neigbouring country that is in the process of introducing VAT in their country.

Answer 1

( a ) A good tax system would require it to be equitable, progressive, efficient, business enabling and, simple or easy to understand for the common citizens.

A tax system needs to be equitable which means it shouldn't unnecessarily put burden on one section of population of the country, be it rich or poor or any other group of people or businesses.

When a tax system is progressive it meas it is based on ability to pay principle, in other words a rich person will pay higher taxes than a poor person due to rich person's ability to pay.

Likewise, it should be business friendly, easy to understand.

In my country, India, the main economic challenges in taxation are poverty of a large section of population of the country, slow pace of industrialization, complex tax rules, evasion by rich people using different channels of investment including in foreign tax havens such as Switzerland.

( b ) Incidence of tax means who actually pays the tax. For example some taxes are charged on someone and incident onsomeone else.

For example, duty charges on imported sugar.

Now, if government shouldn't make a large tax payable by common citizens, rather it should be incident on large businesses.

( c ) Following are four recommendations for VAT:-

( I ) Have least number of variable taxes for simplicity.

( II ) Use latest technology in operation of the the tax system.

( II ) Make it easier to be followed by businesses.

( IV ) Keep it progressive.