Topic: Fundamentals of taxes
and taxation methods
• 1) The gist of taxes
• 2) Functions of taxes
• 3) Elements of taxes
• 4) Methods of taxation
1) The gist of taxes
• Taxation is a system of compulsory contributions levied by a government
on persons, businesses, and property used as a source for government
expenses and other public purposes.
• The purpose of taxation is to finance government expenditure. One
of the most important uses of taxes is to finance public goods and
services, such as street lighting and street cleaning.
• To tax is to impose a financial charge or other levy upon a taxpayer
(an individual or legal entity) by a state or the functional equivalent
of a state such that failure to pay is punishable by law.
Definition of taxes
• A fee charged ("levied") by a government on a product, income, or
activity.
• money, eg a percentage of a person's income or of the price of goods
etc taken by the government to help pay for the running of the state
• A mandatory and non-equivalent payment which included in Tax
code and transfers to budget
Definition of taxes
• pecuniary burden laid upon individuals or property owners to
support the government
• a payment exacted by legislative authority
Specific characteristics of taxes
• Transfers to budget
• mandatory
• non-equivalent
• Assigned by Law (Legislature)
Direct and Indirect taxed
• If tax is levied directly on personal or corporate income, then it is a
direct tax. For example, individual income tax, corporate tax and etc
• If tax is levied on the price of a good or service, then it is called an
indirect tax. For example, VAT, excise and etc
2) Functions of taxes
• Fiscal
• Regulate
• Social
• Control
Fiscal function of taxes
• Money provided by taxation has been used by states and their
functional equivalents throughout history to carry out many functions.
Some of these include expenditures on war, the enforcement of law and
public order, protection of property, economic infrastructure (roads,
legal tender, enforcement of contracts, etc.), public works, social
engineering, and the operation of government itself.
• Governments also use taxes to fund welfare and public services. A
portion of taxes also go to pay off the state's debt and the interest
this debt accumulates. These services can include education systems,
health care systems, pensions for the elderly, unemployment
benefits, and public transportation. Energy, water and waste
management systems are also common public utilities. Colonial and
modernizing states have also used cash taxes to draw or force
reluctant subsistence producers into cash economies.
Regulate function of taxes
• In economic terms, taxation transfers wealth from households or
businesses to the government of a nation.
• The meaning of regulative function of taxes is to affect on economic
behavior of taxpayers.
Regulate function of taxes
• The side-effects of taxation and theories about how best to tax are an
important subject in microeconomics. Taxation is almost never a
simple transfer of wealth. Economic theories of taxation approach
the question of how to maximize economic welfare through taxation.
Social function of taxes
Collected money by taxation usually is spending for social purposes
such as education, health, pensions and etc
3) Elements of taxes
• Object of taxation
• Subject of taxation
• Tax rate
• Tax benefits
• Tax base
4) Forms of taxation
• Proportional
• progressive
• Regressive
• lump-sum
• An important feature of tax systems is the percentage of the tax
burden as it relates to income or consumption. The terms
progressive, regressive, and proportional are used to describe the
way the rate progresses from low to high, from high to low, or
proportionally. The terms describe a distribution effect, which can be
applied to any type of tax system (income or consumption) that
meets the definition.
• A progressive tax is a tax imposed so that the effective tax rate
increases as the amount to which the rate is applied increases.
• The opposite of a progressive tax is a regressive tax, where the
effective tax rate decreases as the amount to which the rate is
applied increases. This effect is commonly produced where means
testing is used to withdraw tax allowances or state benefits.
• In between is a proportional tax, where the effective tax rate is fixed,
while the amount to which the rate is applied increases.
• A lump-sum tax is a tax that is a fixed amount, no matter the change
in circumstance of the taxed entity. This in actuality is a regressive tax
as in actuality those with lower income must use higher percentage
of their income than those with higher income and therefore the
effect of the tax reduces as a function of income