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 good tax system should meet five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease.

Although opinions about what makes a good tax system will vary, there is general consensus that these five basic conditions should be maximized to the greatest extent possible.

1. Fairness, or equity, means that everybody should pay a fair share of taxes. There are two important concepts of equity: horizontal equity and vertical equity.

• Horizontal equity means that taxpayers in similar financial conditions should pay similar amounts in taxes.
• Vertical equity is just as important, however. Vertical equity means that taxpayers who are better off should pay at least the same proportion of income in taxes as those who are less well off. Vertical equity involves classifying taxes as regressive, proportional, or progressive.
  • Regressive tax: A tax is regressive if those with low incomes pay a larger share of income in taxes than those with higher incomes. Almost any tax on necessities, such as food purchased at a grocery store, is regressive because lower-income people must spend a larger share of their income on these necessities. Oklahoma’s sales tax is one example.
  • Proportional tax: A tax is proportional if all taxpayers pay the same share of income in taxes. No taxes are truly proportional. Property taxes often come closest since there is typically a close relationship between a household’s income and the value of the property in which they live. Corporate income taxes often approach proportional because one rate applies to most corporate income.
  • Progressive tax: A progressive tax requires higher-income individuals to pay a higher share of their income in taxes. The philosophy behind progressive taxes is that higher-income people can afford and should be expected to provide a bigger share of public services than those who are less able to pay. The federal income tax is the best example of a progressive tax; the Internal RevenueMoney received by a government entity... Service reports that the top one percent of taxpayers by income paid 37 percent of federal income taxes in 2016.

While no system of taxes is perfect, it is important to seek horizontal equity because taxpayers must believe they are treated equally. It is just as important to seek vertical equity so the government does not become a burden to low-income residents.

2. Adequacy means that taxes must provide enough revenue to meet the basic needs of society. A tax system meets the test of adequacy if it provides enough revenue to meet the demand for public services if revenue growth each year is enough to fundA self-balancing accounting structure with revenues, expenditures, assets and liabilities used to track monies flowing... the growth in the cost of services, and if there is enough economic activity of the type being taxed so rates can be kept relatively low.

3. Simplicity means that taxpayers can avoid a maze of taxes, forms, and filing requirements. A simpler tax system helps taxpayers better understand the system and reduces the costs of compliance.

4. Transparency means that taxpayers and leaders can easily find information about the tax system and how tax money is used. With a transparent tax system, we know who is being taxed, how much they are paying, and what is being done with the money. We also can find out who (in broad terms) pays the tax and who benefits from tax exemptions, deductions, and credits.

5. Administrative ease means that the tax system is not too complicated or costly for either taxpayers or tax collectors. Rules are well known and fairly simple; forms are not too complicated; the state can tell if taxes are paid on time and correctly, and the state can conduct audits in a fair and efficient manner. The cost of collecting a tax should be very small in relation to the amount collected.

Economic issues facing the world economy, as well as regions and countries, include prospects for growth, inflation, energy and the environment, inequality, labor issues, emerging markets, Pandemic Situations, and the impact of new technologies.

Let us take the example of the Pandemic situation we are facing now, the economic impact of the 2020 coronavirus pandemic in my country has been largely disruptive. ... Reports though stated the economic package did not address short term demand concerns, which may, in turn, pull down the economy even more of

• The sharp rise in unemployment
• Stress on supply chains
• The decrease in government income
• The collapse of the tourism industry
• The collapse of the hospitality industry
• Reduced consumer activity
• Plunge in fuel consumption. Rise in LPG sales.

Part B:

Taxation should be of paramount importance to the Government:

Governments impose charges on their citizens and businesses as a means of raising revenue, which is then used to meet their budgetary demands. This includes financing government and public projects as well as making the business environment in the country conducive for economic growth.

Importance of Taxes in Society

Without taxes, governments would be unable to meet the demands of their societies. Taxes are crucial because governments collect this money and use it to finance social projects.
Some of these projects include:

• Health

Without taxes, government contributions to the health sector would be impossible. Taxes go to funding health services such as social healthcare, medical research, social security, etc.

• Education

Education could be one of the most deserving recipients of tax money. Governments put a lot of importance in the development of human capital and education is central in this development. Money from taxes is channeled to funding, furnishing, and maintaining the public education system.

• Governance

Governance is a crucial component in the smooth running of country affairs. Poor governance would have far-reaching ramifications on the entire country with a heavy toll on its economic growth. Good governance ensures that the money collected is utilized in a manner that benefits citizens of the country. This money also goes to pay public servants, police officers, members of parliaments, the postal system, and others. Indeed, with a proper and functioning form of government, there will be no effective protection of public interest.

Other important sectors are infrastructure development, transport, housing, etc.

Apart from social projects, governments also use money collected from taxes to fund sectors that are crucial for the well being of their citizens such as security, scientific research, environmental protection, etc.

Some of the money is also channeled to fund projects such as pensions, unemployment benefits, childcare, etc. Without taxes, it would be impossible for governments to raise money to fund these types of projects.

Furthermore, taxes can affect the state of the economic growth of a country. Taxes generally contribute to the gross domestic product (GDP) of a country. Because of this contribution, taxes help spur economic growth which in turn has a ripple effect on the country’s economy; raising the standard of living, increasing job creation, etc.

Governments also use taxes as a deterrent for undesirable activities such as the consumption of liquor, tobacco smoking, etc. To achieve this, governments impose high excise levies on these products and as a result, raise the cost of these products to discourage people from buying or selling them.

Importance of Tax to Businesses

For a business to flourish in the country, there has to be good infrastructure such as roads, telephones, electricity, etc. This infrastructure is developed by governments or through close involvement of the government. When governments collect money from taxes, it plows this money into the development of this infrastructure and in turn promotes economic activity throughout the country.

The concept of taxation is also important to businesses because governments can fund this money back into the economy in the form of loans or other funding forms.

Taxes help raise the standard of living in a country. The higher the standard of living, the stronger and higher the level of consumption most likely is. Businesses flourish when there is a market for their product and services. With a higher standard of living, businesses would be assured of a higher domestic consumption as well. Taxes are essential and every citizen is meant to reap the benefits of these taxes. This is why it is important that citizens endeavor to pay taxes and understand that it is meant to be more than just a “money grab” from the government.

Part 3

Value-added tax avoids the cascade effect of sales tax by taxing only the value-added at each stage of production. For this reason, throughout the world, VAT has been gaining favor over traditional sales taxes. In principle, VAT applies to all provisions of goods and services.

Value Added Tax or VAT is a tax, which is charged on the ‘increase in value’ of goods and services at each stage of production and circulation. It is also chargeable on the value of all imported goods. It is charged by
registered VAT businesses/persons/taxpayers. Its introduction has not resulted in either increased prices to final consumers or reduced profitability of the business.

1.Easy to Administer & Transparent and Less Litigation,
2. Abolition of Statutory Forms,
3. Deterrent against Tax Avoidance,
4. No Cascading(tax on tax) Effect,
5. Minimum Exemptions,
6.Removal of Anomaly of First Point Taxation.