PRINCIPLES OF BUSINESS

ROLE OF GOVERNMENT

Taxation

A Tax is

– A compulsory monetary payment made by a business or an

individual, as levied by the State.

The State (government) levies taxes for five main reasons

– Raise revenue to finance its programmes

– Income redistribution

– Control spending of consumers and businesses

– Maintain economic stability

– Satisfy specific objectives

Direct Taxation

A direct tax

1. When the burden and payment of the levy is the responsibility the

individual or the company, it is called a Direct Tax.

2. Only the citizens of the country bear the burden of a direct tax.

3. When the impact (payment) and the incidence (burden) fall on the same

person, it is called a Direct Tax.

This type of tax is often subject to evasion; and is costly to collect when people

don’t comply.

– Income Tax

– Corporation tax

– Capital Gains and Capital Transfer Taxes

– Stamp Duties (on contracts)

– Land Tax

Indirect Taxation

An indirect tax

1. When the burden and the payment of the levy are not the responsibility

of the same person, it is called an Indirect Tax.

2. Everyone [residents and visitors] that uses the resources of the country

bear the burden of the indirect tax.

3. When the levy on one person is collected and paid by someone else, it is

called an Indirect Tax.

This type of tax is very difficult to evade because it is levied at the point of

purchase/ consumption.

• Value Added Tax (VAT)

• Customs & Excise Duties

• Purchase Tax

The Tax System

A tax system should be such that citizens do not feel too burdened or

inconvenienced to want to pay the levy.

• Equality

• Certainty

• Convenient

• Economical

• Flexible

• Neutral

• Stable

Forms of Tax

Progressive taxation

• A format where those who earn a higher income are required to pay

a larger proportion of their income than those who earn a lot less.

Regressive taxation

• A format where those who earn a higher income is bearing a lesser

burden than those who earn a lot less.

Proportional taxation

• A format where those who earn a higher income are required to pay

the same proportion of their income as those who earn a lot less.

The negative side of taxes

Governments have to be very careful when imposing taxes as the outcome may

not always be what they expected.

• Some tax regimes discourage people from working harder

[progressive taxation]

• Some taxes may lead to price increases – which may cause inflation

• Some tax regimes reduce benefits as one moves to a higher income

• Some taxes have a negative effect on peoples desire to save

• Some taxes can impact the market price mechanics negatively.