Question

1.

ssume you are a fresh graduate from University of Kenya 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

Solution:

a)A good tax system must possess the followiing characteristics:

i)Simplicity:The tax system should permit fair and non-arbitrary administration and it should be understandable to the tax payer.It means that the tax system should be easily comprehensible to the tax payer.It means that its nature,method and basis of estimation should all be easily followed by each tax payer.

ii)Convenience:Every tax ought to be levied at the time,or in a manner in which it is most likely to be convenient for the contributor to pay it.

Economic challanges that affect taxation in the country are:

i)Incomes tends to be unevenly distributed in the countries like Kenya.Although raising high tax revenues in this situation ideally calls for the rich to be taxed more heavily than the poor,the economic and political power of rich taxpayers often allows them to prevent fiscal reforms that would increase their tax burdens.

ii)The ideal tax system  should raise essential revenue without discouraging economic activity and without deviating too much from tax systems in other countries.

b)Tax incidence means the final placing of a tax.Importance of Incideence of taxation:

i)The tax system is not merely aimed at raising a certain amount of revenue,but the aim is to raise it from those section of people who can best bear it.That is why incidence of taxation is important.

ii)The incidence of tax make the government aware of who bear the tax burden and accordingly government make adjustment in its tax system.