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