Taxation may be defined as the act or method of imposing a compulsory levy by the government or its agency on individuals and firms or on goods and services.
Tax on the other hand is defined as a compulsory levy imposed by the government or its agency on individuals and firms or on goods and services.
Features or Characteristics of Tax
- It is a compulsory levy that must be paid by individuals or corporate bodies.
- It is levied by the government or its agencies.
- It is a payment made as a sacrifice.
- Tax is meant for the general welfare of every body.
- Tax payment has age limit, e.g. people must attain certain age level before they can pay tax.
Principles of a Good Tax System
Adam Smith in his book Wealth of Nation has laid down certain principles of a good tax system which he called canons of good tax system. These principles include:
- Equity or ability to pay: People should be made to pay tax according to their abilities. This implies that tax revenue should be raised without causing undue hardship to the tax payer.
- Economy: The principle states that the cost of tax collection should be cheap relative to the revenue yield.
- Convenience: A tax should be convenient as to form, time and place of payment. For example, an import duty should be duly paid as the imported goods arrive the country.
- Certainty: The tax should be certain and clear to everybody concerned. The time of payment, the manner of payment and the amount to be paid should be clear and plain to the tax payer.
- Revenue yield: From the standpoint of government, the total revenue that a tax yields is of considerable importance. Governments are comfortable with taxes that provide a fairly predictable and steady income.
- Neutrality: An important consideration in evaluating tax is how the tax affects production, savings and people’s willingness to work. A good tax system should not interfere unnecessarily with the supply and demand for goods and services.
- Benefits-receive principle: It is argued that those who benefit most from government supplied goods or services should pay the taxes necessary for their financing. For example, petrol taxes are typically earmarked for financing road construction and repairs, toll gates, etc.
- Flexibility: The tax system should be flexible enough for adjustments when the need arises.
- Simplicity: A tax system should not be difficult to administer and understand. It should not cause problems of differences in interpretation.
Reasons or Why Government Impose Taxes
There are many reasons why government or its agencies impose taxes on individuals or corporate bodies. Tax is known to be used to improve the economy of a country. The reasons for the imposition of tax include:
- To raise revenue: Taxes are used to raise revenue for government. Through this, money required for the provision of essential services, general administrative purposes and financing of capital projects are made available.
- To redistribute income: Through the Pay As You Earn (P.A.Y.E.) system, government can narrow the gap between the rich and the poor by introducing progressive taxation.
- Discouragement of production and consumption of harmful goods: Taxes are used to discourage the production and consumption of harmful goods. Indirect taxes imposed can lead to higher prices which can discourage the consumption of certain goods.
- To control inflation: Taxes can be used as anti-inflationary devices. Government can do this by increasing direct tax without increasing its expenditures.
- To protect infant industries: Taxes can be used to protect newly established industries from competition with foreign firms.
- To correct an adverse balance of payment: Taxes are used to correct an adverse balance of payment. Importation of foreign goods could be restricted by the use of heavy import duties thereby conserving foreign exchange. This will have effect on balance of payments.
- Prevention of dumping: Taxes are used to prevent dumping by the imposition of high import duties on foreign made goods. Dumping is a condition in which goods are sold abroad at cheaper prices than are sold in the country in which they are produced. Dumping ruins local industries easily.
- Direction of production and investment: Taxation can be used to direct production and investment, e.g. tax exemptions or rebates for industries located in rural areas.
- Promotion of economic growth: Taxes can be used to promote economic growth. Government can reduce taxes on company profits so that these profits are ploughed back into business to aid expansion and stability.
- Retaliatory measure: Taxation can be used as a retaliatory measure in international trade.
- Employment purposes: Government can manipulate taxation to achieve the desired employment level.
- Savings: Taxation can be used to encourage savings and investments.
Economic Effects of Taxation
- Effect on production: Production will be affected or reduced if excise duties are high.
- Effect on inflation: An increase in indirect taxes and a decrease in direct taxes by government can lead to increase in the volume of money in circulation thereby leading to inflation.
- Effect on consumption: Consumption of some harmful goods can be reduced if government imposes heavy tax on such harmful goods.
- Effect on investment: Imposition of high excise duty, company tax etc. on investors by government will discourage investors from investing in businesses.
- Effect on prices of goods and services: When government imposes high excise duty this will make cost of production to be very high which could lead to high prices of goods so produced.
- Effect on salaries of workers: Income tax tends to reduce the disposable income of the workers.
- Effect on demand and supply: High indirect taxes will make demand and supply to be low as few goods will be produced because prices are very high.
- Effect on savings: High level of taxation on individuals or corporate bodies can lead to reduction in savings.
Problems Associated with Tax Collection
Difficulties encountered by tax collectors in Nigeria include:
- Failure to fulfil civic responsibilities: Many people do not fulfil their civic responsibilities of paying tax as at and when due.
- Failure to declare real income: Many workers and corporate bodies, especially those in private firms, do not declare their real incomes.
- Failure to meet people’s expectation: Many people have the belief that the money they pay as tax should be used only for the provision of social amenities. They will resist payment of tax if these anticipated amenities are not provided.
- Tax evasion: High taxes scare potential payers away.
- Insincerity of tax collectors: Majority of the tax collectors are not sincere as they pay a little of what they collected to the government and put the remaining in their personal pockets.
- Lack of book of account: Majority of the traders and small scale businesses do not keep proper book of account for the purpose of proper tax assessment.
- Wrong belief of the people: Many people think that the money collected is for the tax collectors and therefore refuse to pay tax.
- Mismanagement of government fund: Embezzlement and misappropriation of government fund by those at the corridors of power usually kill people’s morale or interest to fulfil their civic obligation of paying tax.