Question

Assume you are a fresh graduate from GTUC 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 requires 4 conditions to be met:

1.Fairness- It means that everyone with a similar economic status should pay a similar amount of taxes.

2. Adequacy- It means that taxes should be enough to meet the basic demands of society. Taxes should be enough to fund the cost of services provided to the public.

3. Simplicity- The tax system should be simple enough so that the taxpayers are not caught up in forms and filing requirements. A simpler system reduces the cost of compliance and helps taxpayers in understanding the tax system easily.

4. Transparency- The tax system should be transparent enough so that taxpayers should know where the tax money is getting used, who is paying how much tax and who is availing the credits.

Economic Challenges affecting taxation:

1. The need to address the severe fiscal deficit problem due to enhanced government expenditures and less direct tax collections.

2. The need to make tax filing system more taxpayer-friendly and simple.

3. The need to design tax structures according to various types of tax, this will ensure more tax compliance.

B. Reasons why the incidence of taxation should be of paramount importance to the Government:

1. Taxes are backbones of economy, Government needs tax for the welfare and for the economic and social growth of the nation as a whole.

2. Tax incidence tells who is in the best position to bear the taxes. The aim of the Government is to secure a just distribution of the tax burden.

Four major recommendations:

1. Coordinated efforts should be undertaken at Central, state and local administration levels. The aim should be to reduce the compliance cost

2. Broadening the base of central and state taxes and keeping the tax structure easy and simple should be a priority

3. VAT implementation should be encouraged by providing adequate administrative machinery for better functioning of tax regime.

4. Making the transition to the information-based system, online filing of tax returns, compiling of tax returns online.