ch 1

Part One
A General Overview
1
What is Public Finance?
• According to Dalton (1941), ‘Public finance is

the branch of knowledge which is concerned
with the income and expenditure of public
authorities and with the adjustment of one to
another’. It deals with the study of revenue
and expenditure of the government at the
center, state and local bodies.
2
Cont’d
• The public authorities have to perform
various functions such as maintenance of
law and order, provision of defense,
production for bringing in economic
development.
• The performance of these functions

require large amount of funds which is
raised through taxes, fees, fines,
commercial revenues and loans.
3
Public Revenue
This is one of the branches of public
finance. It deals with the various
sources from which the state might
derive its income. These sources
include incomes from taxes,
commercial revenues in the form of
prices of goods and services supplied
by public enterprises, administrative
revenues in the form of fees, fines etc
and gifts and grants.
4
Difference between Public
revenue and Public receipts
Public revenue includes that income

which is not subject to repayment by
the government. Public receipts
include all the income of the
government including public
borrowing and issue of new currency.
In this way public revenue is a part of
public receipts.
Public Receipts = Public revenue

+ Public borrowing + issue of new 5
Cont’d
• Every government has two

important sources of revenue.
• These are:
Tax sources, and
Non-tax sources
6
Taxation
• The most important source of
revenue of the government is taxes.
• The act of levying taxes is called

taxation.
• Taxation is a compulsory collection

of money by government;
7
Definition of Tax
• A tax is a compulsory charge or payment imposed
by government on individuals or corporations.
• Tax is defined as a compulsory contribution levied

on persons, property, or businesses for the
support of government for economic and social
operations.
• In other words, it is money paid to a government

to fund its programs and services.
8
Essential characteristics of tax
include:
• It is an enforced contribution
• It is generally payable in money.
• It is proportionate in character, usually
based on the ability to pay
• It is levied on persons and property within
the jurisdiction of the state
• It is levied pursuant to legislative authority,
the power to tax can only be exercised by
the law making body
• It is levied for public purpose
• It is commonly required to be paid a
regular intervals. 9
Objectives of Taxation
• Initially, governments impose taxes for
three basic purposes:
 To cover the cost of administration,
 Maintaining law & order in the country and
 For defense.
• But now government’s expenditure pattern

changed and gives service to the public
more than these three basic purpose.
10
Cont’d
 Therefore, governments need much amount
of revenue than before. To generate more
revenue a government imposes taxes on
various types.
 In general objective of taxations are:
• Raising revenue
• Removal of inequalities in income and
wealth
• Ensuring economic stability
• Reduction in regional imbalances
11
Cont’d
• Capital accumulation
• Creation of employment
opportunities
• Preventing harmful consumptions
• Beneficial diversion of resources
• Encouragement of exports
• Enhancement of standard of living
12
Why do governments bother to tax?
Alternatively, government could:
• Finance its expenditures by printing money;
• Compulsorily seize the goods or services it needs,
or
• Borrow money.
Problems with the above alternatives:

• Printing money merely debases the currency and
causes inflation;
• Compulsory acquisition is a crude and not very
fairly distributed form of impose and in any event
under our constitution requires just
compensation and
• Borrowed money must be repaid or interest bill
met. 13
Principles of Taxation
• How should a tax system be designed

to raise a given amount of revenue?
• What criteria should be used to

evaluate the advantages and
disadvantages of a particular tax
system or tax policy proposal?
14
• There are various criteria (principles) that can
be followed in evaluating a tax policy proposal
(tax structure);
• Some of them are in conflict against each other;
• Some of the criteria such as equity are

subjective;
• People may disagree on the relative importance

of the criteria;
15
• Adam Smith (1776, ed 1952) calls them
canons of a tax system.
• There are four canons of taxation as

prescribed by Adam Smith (1776, ed
1952).
 Equity
 Economy
 Certainty
 Convenience
16
• Smith’s canons were later extended
by other writers to include:
Productivity
Flexibility
Simplicity etc
17
1. Equity
•One vital principle of a good tax system is
fairness (equity).
•This canon requires the tax system to be
equitable.
•Taxes imposed should be fairly and equitably
distributed.
•Everyone agrees that the tax system should be
equitable, i.e., that each taxpayer should
contribute his/her “fair share” to the cost of
government.
There are two strands of thought in this
connection:
•The benefit principle
18
•The ability to pay principle
Benefit principle
• An equitable tax system is one under
which each taxpayer contributes inline
with the benefits which he/she receives
from public services.
• The truly equitable tax system will differ
depending on the expenditure structure.
• The benefit criterion, therefore, is not one
of tax policy only, but of expenditure
policy.
• Under this approach the total expenditure
should be determined and then the share
of each taxpayer on government
expenditure should be known; 19
Ability to pay principle
• The tax problem is viewed by itself
independent of expenditure
determination.
• A given total revenue is needed and
each taxpayer is asked to contribute in
line with his/her ability to pay.
• The subjects of every State ought to
contribute towards the support of the
government, as nearly as possible, in
proportion to their respective abilities;
• The ability to pay principle is widely
accepted as this guide. 20
2. Certainty
• The tax which each individual is
bound to pay ought to be certain and
not arbitrary.
• The time of payment, the manner of
payment, the quantity to be paid
should all be clear to the taxpayer
and to every other person.
• Certainty pertains to objectivity.
21
3. Convenience
• The mode and timing of tax

payments should be convenient to
taxpayers.
• This canon recommends that

unnecessary trouble to the taxpayer
should be avoided, otherwise various
ill-effects may result.
22
4. Economy
• “Every tax should be so designed as
both to take out and to keep out of
the pockets of the people as little as
possible over and above what it
brings into the public treasury of the
state” (Smith 1776, (1952 ed), p
362).
• Taxes should not cause an
unnecessary burden to the society in
the form of costs over and above the
tax liability. 23
• In addition to the actual payment of
taxes, taxes induce other costs:
– Compliance and administrative
costs (tax operating costs)
– Efficiency costs
• Tax compliance costs – costs

incurred by taxpayers and third
parties in the process of complying
with the requirements of a tax
legislation;
24
• Tax administrative costs can be
broadly viewed as resources
sacrificed by the public sector in
connection with a tax system.
• Public sector costs of taxation

conceptually constitute those costs
which would not have been incurred
if the tax had never been introduced
(Sandford et al. 1989).
25
Economic Efficiency
• Economic efficiency can be thought
of as the effectiveness with which an
economy utilizes its resources to
satisfy people’s preferences.
• When resources are directed to their
highest valued uses the economy is
said to be efficient.
26
5. Productivity
• Also called canon of fiscal adequacy.
• The tax system should be able to yield
enough revenue for the treasury and the
government should have no need to resort
to deficit financing.
6. Flexibility
• It should be possible for the authorities
without undue delay to revise the tax
structure both with respect to its coverage
and rates, to suit the changing requirements
of the economy and of the Treasury.
27
7. Simplicity
• The tax system should not be too
complicated.
• Complex tax system is difficult to
understand and administer and
breeds problems of interpretation
and legal disputes.
28
The End!
Thank You!
29

ch 1

Uploaded by

Copyright:

Available Formats

ch 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ch 1

Uploaded by

Copyright:

Available Formats

Part One

• According to Dalton (1941), ‘Public finance is

• The performance of these functions

Public revenue includes that income

Public Receipts = Public revenue

• Every government has two

• The act of levying taxes is called

• Taxation is a compulsory collection

• Tax is defined as a compulsory contribution levied

• In other words, it is money paid to a government

• But now government’s expenditure pattern

Problems with the above alternatives:

• How should a tax system be designed

• What criteria should be used to

• Some of them are in conflict against each other;

• Some of the criteria such as equity are

• People may disagree on the relative importance

• There are four canons of taxation as

• The mode and timing of tax

• This canon recommends that

• Tax compliance costs – costs

• Public sector costs of taxation

You might also like