MEANING OF TAXATION
In Economics, Taxation is defined as the means through which government finances its expenditure by imposing financial charge or other levy on citizens and corporate entities
Simply put, taxation is the act of imposing a compulsory levy by the government or its agency on individuals and firms in other to raise money required to finance public projects.
Taxation is also a way through which government regulates certain economic activities.
Types of Taxes
- Direct Taxes
- Indirect Taxes
Direct Taxes – These are taxes that are directly paid to the government by the taxpayer. Direct taxes are levied on individuals and organisations directly by the government e.g. income tax, corporation tax, wealth tax etc.
Note that direct taxes can’t be shifted to another. The tax payer pays directly to the government.
Indirect Taxes – These are taxes resulting from manufacturing or sale of goods and services. They are taxes collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). Examples of indirect taxes include: sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST)
Note that indirect taxes can be shifted to another person or group.
PAY AS YOU EARN (PAYE)
The PAYE system is a method of Income tax through which the taxpayer’s employer calculates and deducts the amount(s) due each time a payment of wages, salary, etc. is made to the tax payer.
Features/ characteristics of tax
- Direct Tax payment has age limit
- Tax is a compulsory levy that must be paid by an individual or corporate body
- It is levied by the government or its agencies
- Tax payment is made for the general welfare of the public
- Tax is made for the growth and development of the country
Principles of a good tax system
Adam Smith gave the following as the principles of a good tax system
- Principle of certainty: This principle states that the tax should be certain and clear to everybody concerned; the amount to be paid and the manner of payment should also be clear and plain to the tax payer.\
- Principle of equity: This principle states that tax should be paid based on your abilities, it should be paid without causing undue hardship to the payers.
- Principle of neutrality: this principle says that a good tax system should not in any way interfere unnecessarily with the supply and demand for goods and service. It studies the effect people’s ability to save, produce and their willingness to work.
- Adequacy: taxes should be just-enough to generate revenue required for provision of essential public services
- Broad Basing: taxes should be spread over as wide as possible section of the population, or sectors of economy to minimize the individual tax burden
- Compatibility taxes should be coordinated to ensure tax neutrality and overall objectives of good governance
- Convenience: taxes should be enforced in a manner that facilitates a way to the maximum extent possible.
- Earmarking: tax revenue from a specific source should be dedicated to a specific purpose only when there is a direct cost-and-benefit link between the tax source and the expenditure, such as use of motor fuel tax for road maintenance
- Efficiency: tax collection efforts should not cost an inordinately high percentage of tax revenues
- Neutrality: taxes should not favor any one group or sector over another, and should not be designed to interfere-with or influence individual decisions-making.
- Predictability: collection of taxes should reinforce their inevitability and regularity.
- Restricted exemptions: tax exemptions must only be for specific purposes (such as to encourage investment) and for a limited
- Simplicity: tax assessment and determination should be easy to understand by an average taxpayer
Reasons government imposes tax
- To redistribute income: the government uses tax to redistribute wealth.
- It is used to correct the adverse balance of payment: Taxes are used to correct the adverse balance of payment. Importation of foreign goods can be reduced through the use of high import duties.
- To protect infant industries: Government can help to protect new industries from competition through tax waver
- Promotion of Economic growth: Taxes can be used to promote economic growth. Government can reduce taxes on company profits so that these profits are diverted back into the business for expansion.
- Employment purpose: Government can also manipulate taxation to achieve desired employment level. Also the money paid by the tax payers can be used to create more jobs for the unemployed.
- To control inflation: Taxes can be used as anti-inflationary devices; this can be possible if the government increases direct tax without increasing her expenditure.
Problems associated with tax collection in Nigeria
- Failure of the tax payers to declare real income
- Failure on the part of government to meet people’s expectation
- Mismanagement of government fund
- Wrong belief of the people
- Tax evasion i.e. high taxes scare people away and people avoid paying tax.
- Insincerity of the tax collectors.