Question

Explain the role of taxation in the economy. Mention the different types of taxes. Discuss challenges of tax collection country of your choince.

4 pages

Answer 1

Explain the role of taxation in the economy.

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.

Tax is a contribution exacted by the state. It is a non penal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria. Tax regimes vary from country to country but are an integral part of most governments in industrialized countries.

The classical economic were in view that the only objective of taxation was to raise government revenue. But with the changes in circumstances and ideologies, the aim of taxes has also been changed. These days apart from the object of raising the public revenue, taxes is levied to affect consumption, production and distribution with a view to ensuring the social welfare through the economic development of a country. For economic development of a country, tax can be used as an important tool in the following manner.

1. Economic Development:

One of the important objectives of taxation is economic development. Economic development of any country is largely conditioned by the growth of capital formation. To overcome the scarcity of capital, governments of these countries mobilize resources so that a rapid capital accumulation takes place. To step up both public and private investment, government taps tax revenues. By raising the existing rate of taxes or by imposing new taxes, the process of capital formation can be made smooth.

1. Resource Redistribution:

Being the most important source of public revenue, Taxes can be used to transfer resources form one section of society to another section of the society. The imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. The revenue I s allocated on various productive sectors in the country with a view to increasing the overall growth of the country. Tax revenues may be used to encourage development activities in the less developments areas of the country where normal investors are not willing to invest.

1. Revenue generation:

Taxation is used by the government to raise revenues for its operations, infrastructure, welfare, education and Defense. In modern times, the aim of public finance is not merely to raise sufficient financial resources for meeting administrative expense, for maintenance of low and order and to protect the country from foreign aggression. Now the main object is to ensure the social welfare. The increase in the collection of tax increases the government revenue. It is safer for the government to avoid borrowings by increasing tax revenue.

4. Encourage savings and investment:

Since developing countries has mixed economy, care has also to be taken to promote capital formation and investment both in the private and public sectors. Taxation policy is to be directed to raising the ratio of savings to national income.

5. Reducing Inequality:

Tax money is used to serve the weaker sections of the society through the welfare programs. Through reducing inequalities in income and wealth by using an efficient tax system, government can encourage people to save and invest in productive sectors.

6. Acceleration of Economic Growth:

Tax policy may be used to handle critical economic situation like depression and inflation. In depression, tax is set to increase the consumption and reduce the savings to increase the aggregate demand and vice versa. Thus, the tax policy may be used to strengthen incentives to savings and investment.

7. 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

8. 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.

9. Control of Cyclical Fluctuations:

Periods of boom and depression—is considered to be another objective of taxation. During depression, taxes are lowered down while during boom taxes are increased so that cyclical fluctuations are tamed.

                                                              

10. Reduction of BOP Difficulties:

Taxes like custom duties are also used to control imports of certain goods with the objective of reducing the intensity of balance of payments difficulties and encouraging domestic production of import substitutes.

Mention the different types of taxes

There are a number of different taxes. They can be categorized in a number of ways. Let's take a look at some of the common tax breakdowns:

Business Taxes

A business must pay a variety of taxes based on the company's physical location, ownership structure and nature of the business. Some of the common taxes paid by business are:

• Federal Income Tax: A tax levied by a national government on annual income.

• State and/or Local Income Tax: A tax levied by a state or local government on annual income. Not all states have implemented state level income taxes.

• Payroll Tax: A tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the United States, both state and federal authorities collect some form of payroll tax. In the United States, Medicare and Social Security, also called FICA, make up the payroll tax.

• Unemployment Tax: A federal tax that is allocated to state unemployment agencies to fund unemployment assistance for laid-off workers.

• Sales Tax: A tax imposed by the government at the point of sale on retail goods and services. It is collected by the retailer and passed on to the state. Sales tax is based on a percentage of the selling prices of the goods and services and is set by the state. Technically, consumers pay sales taxes, but effectively, business pay them since the tax increases consumers costs and causes them to buy less.

• Foreign Tax: Income taxes paid to a foreign government on income earned in that country.

• Value-Added Tax: A national sales tax collected at each stage of production or consumption of a good. Depending on the political climate, the taxing authority often exempts certain necessary living items, such as food and medicine from the tax.

Personal Taxes

• Income Tax

The federal government of the US collects tax on income. Additionally, most state governments also have some local taxes.

·Excise Taxes

These are taxes paid when purchases are paid on a specific good. They are often included in the price of the good. So, if the good is subject to sales tax, one may be paying tax on a tax. A common example is federal gasoline excise tax of 18.4% (24.4% on diesel fuel).

·Consumption Taxes

Otherwise known as sales tax, consumption taxes are more heavily levied on the wealthy in the sense that the more one consumes, the more one is taxed. Because this tax is assessed as a percentage of the sales price, it’s a simple equation: The more you buy, the more you pay.

·Property Taxes

Property taxes are the oldest form of taxation, and in the U.S., the funds usually go toward local concerns, such as sewage treatment, road maintenance, and drinking water. They’re calculated based on the value of one’s property, which includes the value of the land itself plus the value of any buildings one has on it, such as one’s home. Property taxes go up by predetermined amounts set by county assessor or equivalent office.

·Estate Taxes

Federal estate taxes are one area in which the “average” person can rest easy – and the wealthy may sweat a little bit. If a person who dies gives away property and the property Is beyond the prescribed limit is taxed at as high as 50%. These are called estate taxes and gift taxes.

·Capital gains taxes

These are those paid on any profits made from the sale of an asset and are usually applied to stock and bond transaction.

Discuss challenges of tax collection country of your choice.

All civilized countries need to collect taxes for several reasons, such as to finance developmental activities, to meet their day-to-day expenses related to maintenance of a free and fair society, to control the economy through fiscal measures, and to a certain extent, to change the economic behavior of people. This authority of national governments to collect monies from taxpayers must recognize a balance between the nations’ authority to tax and taxpayers' rights. Thus, the real challenge for nations is to ensure that taxpayers are treated with fairness, justice, and equity, while national governments assert their jurisdiction as taxing authorities.

The tax administrators of developing countries face many challenges in the massive task of tax collection. Nevertheless the problem of tax evasion bothers tax administrators of developing countries and developed countries alike.

Challenges faced by Uganda Revenue Authority

• Businesses are largely informal for instance, of the 130,000 members of Kampala City Traders Association (KACITA) not more than 15% are formally registered and majority are not registered as tax payers. This makes it hard to effectively collect taxes

• Many businesses are not registered for tax obligations under Value Added Tax (VAT), although this might sound disadvantageous to them, it makes it easy for them to evade taxes.

• Ignorance about rights and obligations: Traders decide to abandon goods over petty cases and URA auctions the goods at give away prices leading to the collapse of businesses and eventual revenue loss to URA.

• The porous borders of Uganda especially with countries that experience insurgencies like Democratic Republic of Congo (DRC), Southern Sudan where many restricted products are not taxed. This can be determined by the amount of prohibited goods that are traded.

• Low tax base due to low economic activities. Being a largely subsistence based agricultural country; the tax base is low hence leading to increased tax burden. Uganda has not done enough to make use of its comparative advantage in agriculture in spite of having the biggest proportion of arable land in the region.

• Bureaucratic systems at URA. Delayed decision making by URA staff for instance some complaints which could have taken days end up taking months to be resolved. This is in spite of the reforms made at URA.

• Massive exemptions due to political patronage. This has resulted into taxes being waived for a selected few yet other businesses are going under due to high taxes. No system and criteria is followed in tax exemption.

• Deliberate budget proposals aimed at politicking. Some budget proposals are approved on political rather than economic grounds hence hindering revenue collection.

• Lack of accountability in public utilities and goods. While this is the best judgment of performance, service delivery in Uganda is still lacking e.g. some roads budgeted for in the previous financial years have not yet been worked upon without any explanation. This makes it hard to convince people to declare incomes and pay taxes since they are not seeing results.

• Unprofessional clearing agents and firms. Some clearing agents over charge their clients and make abnormal profits while paying less to URA. In essence both the trader and URA stand to lose.

• FDI promotion and opting for tax incentives. This has resulted into gross loss of revenues as massive investments go untaxed.