Tax is the compulsory monetary contribution towards the state's revenue without direct reward. It is imposed and assessed by governments to meet its expenditure for a common course. In many countries, tax is levied under similar principles. It's common to find that tax is levied where there is income, expenditure, occupation, property, privilege and failure to pay attracts a penalty. Though there are numerous reasons why tax is levied by states', the major reason is to finance its budget. Other reasons for taxation could be, to protect local industries, stabilize economy and protect citizens from harmful products. Governments' usually impose heavy penalties to discourage evasion and default.
Taxes vary from country to country but there are common different types of taxes; corporate taxes, income taxes, excise tax, customs duty, value added tax, property tax , inheritance and estate tax. Tax is collected by government agencies such as the Internal Revenue Service (IRS) of the United States and Canada Revenue Agency. The first taxation system was recorded in Ancient Egypt between 3000BC and 2800BC; The Pharaohs 'would tour the kingdom collecting taxes from the residents. A well controlled system later developed in Persian Empire where provincial governors would collect taxes and remit to the authority after deducting administrative expenses. Taxation rates increased sharply in Europe during the world war period as war became expensive and states became adroit in collection.
Most political philosophers think that tax is justified because it funds activities that are of importance to the state such as health care and security. They believe that taxation in modern society benefit majority of citizens and supports development of a country. The American conservative believed that tax should be paid as part of the normal obligation to follow the law. Social democrats prefer higher taxes to finance variety of services to the public such as health care and education. Proponents of business taxation argue that commercial activity are executed on publicly established infrastructure and should therefore be charged for use. Some political philosophers argue that government forces and coercion people to pay taxes through its legal system and its therefore theft or tyranny. Anarcho-capitalists, voluntaries, objectivists and libertarians view taxation as aggression. Libertarian claims that state protection such as police and defense could be replaced by alternatives, such as private defense agencies, arbitration agencies or voluntary contribution. Williams 2000, economists argue that, "Government income redistribution programs produce the same results as theft. In fact, that's what a thief does; he redistributes income. The difference between government and thievery is mostly a matter of legality". Socialists and communists have also made contribution in opposing taxation. Karl Marx assumed that communism would wither away the state and therefore taxation would be unnecessary. In socialist economies like China, taxation had lesser importance because most state income was derived from ownership of enterprises (Barbone, Das-Gupta, De Wulf and Hansson, 1999).
Throughout history, revenue from taxation is known to carry out many functions. Some of these functions are; financing of wars, maintenance and enforcement of law and order, building of infrastructures, provision of utilities and many others. Governments impose different kinds of taxes and tax rates to ensure the desired effect is achieved. This is also done to shift tax burden among demographics in taxable bracket, as such, wealth is redistributed. If the intention of a government is to encourage importation then, it can waive tax while a move to discourage importation would lead a government to charging high taxes on imported goods. Taxation has four main effects or purposes: revenue, redistribution, re-pricing and representation. Taxes generate revenue that is used by government to finance its budget. The need to address the need arising from human development such as food, clothing and emergency medical treatment calls for contribution through tax. Also the need to improve economic potential, create and maintain institutions and governance structures makes tax a more complex but important issue.
This is a secondary role of the tax system; it can uplift some of its poorest citizens from poverty. The different tax rates to different classes of population causes redistribution of wealth, normally, from the rich to the poor. The slogan 'no taxation without representation' that stretches back to US revolt against the British better describes this function. Resource rich states where tax burden is less among the citizens tend to suffer from bad governance and widespread exclusion. Citizens of a nation demand accountability and better governance from their leaders for taxes paid. This can be the states' tool to influence the behavior of individual and corporate bodies. Tax is also imposed to tackle externalities, for example, beer and tobacco are charged high tax to discourage consumption because of their effect to the society. An optimum tax system is one which satisfies most of the canons of taxation. An Economist, Adam Smith, argues that an optimum tax system should fulfill four principles; equity, economy, certainty and convenience. Later, other economist expounded on these to include; simplicity, flexibility, elasticity, diversity and productivity.
Canon of equity stipulates that a person should pay tax according to his ability and not the same amount. It should be in proportion to ones income. The progressive rate of taxation is adopted to satisfy this principle of taxation. This principle states that the cost of collecting tax should not exceed the amount of tax to be collected. It should also be economical to the tax payer i.e tax payers should have sufficient money left with them after paying tax otherwise, investment and savings would be affected negatively. The state should be certain of the revenue expected, the time it's expected and the mode of payment. The tax an individual ought to pay should also be certain and not arbitrary. The time of payment, amount to be paid and manner of payment should be clear to everyone.
Every tax ought to be levied in the most expedient manner to the tax payer for example payment of value added tax is best when withheld at the point of sale because one pays when he buys the goods or service and at the time when he has the time to pay. This requires that the tax system should be so simple to be understood by an ordinary person. The forms to be used in the mode of payment and computation should be simple to the extent that tax payer does not require expert assistance in filling the forms. Tax provisions, rules and regulation should be easily amended, adjusted or discarded to meet the revenue requirement of the state. The dynamic nature of the business requires a dynamic tax system to avoid evasion or loopholes that may arise.
The government should be able to raise or reduce the tax rate whenever the need arises. A tax raise should not affect productivity of the specific tax substantially to be uneconomical. This principle stipulates that a tax system should be able to raise a substantial amount of revenue to the government. A system whose yield is not substantial should be discarded in order to reduce unnecessary number of taxes in the country. There should be a variety of taxes so that all citizens contribute to the citizen revenue accordingly to their ability to pay. A single or few taxes would neither meet the revenue requirement of the state nor satisfy the canon of equity. There should be a variety of direct and indirect taxes to cater for the different tax scope but at the same time avoiding large multiplicity that would be uneconomical (De Mooij, Ruud and Sjef Ederveen, 2003).
Taxes are broadly classified by effect, by base or by rates. Classification by effects refers to the impact and incidence of tax. Impact refers to the person who has responsibility of collecting and paying the tax while incidence refers to the person who bears the burden. In case of direct tax, the impact and incidence is on the same person while for indirect tax, impact is on one person and the incidence on another. However, incidence of tax can be shifted forward or backwards. Forward shifting occurs when a trader passes on an increase of tax to the consumers through sales. This is possible when the demand of goods is inelastic. Backward shifting of tax refers to shifting of tax by trader to the supplier and is applied when the demand of goods is elastic.
Classification by base refers to the object upon which tax is computed for example, income tax is computed based on individuals' income while corporate tax is based on profits of body corporate. Classification by rates is considered to be percentage of base value. It is classified into progressive rates, digressive rates, proportional rates and regressive rates. Under progressive rate, tax increases as the income increases. Progressive rate of taxation is widely used in most countries since the rich are made to pay more taxes than the poor (Davoodi, Tiongson and Asawanuchit, 2003). The digressive rate of tax is similar to progressive rate but the only difference is that the rate of progression is not as steep as the progression rate of taxation. Proportional tax rate is a flat rate of tax charged at all levels of income for example, a corporate tax rate of 30%. Under regressive tax rate, as income reduces tax increases. This method is rarely used as it defies the principle of equity.
However taxes can be classified as follows; Advarolem tax this is where tax is based on value of property, good or service. Value added tax, sales tax, property tax and inheritance tax are different types of ad valorem tax. It may be imposed at the time of the transaction, annually or on occurrence of a significant event (Teera, 2002). The other type is the Excise tax whereby it is based on the quantity produced as opposed to value in the ad valorem tax and is levied on locally manufactured goods. A good example is the excise tax of 18.4 cents per U.S gallon of gasoline imposed by the federal government. It's a common tool used to modify consumption patterns, high tax on harmful products discourage consumption while exemption encourages consumption expatriation tax is a tax that is imposed on individuals who renounce citizenship of some countries. In US, an individual who is worth $ 2 million and renounces citizenship is assumed to have done so for tax avoidance and is subject to a higher tax rate (De Mello, and Tiongson, 2003). In addition, income tax is the tax charged on income earned by persons, legal entities, or corporations; Tax charged on corporations is called corporate tax. Individual income taxes are charged on total individual income less permitted deductions. The other type is the Inheritance tax that is imposed on death of an individual, various taxes arise; inheritance tax, estate tax and death duty. In US, a distinction exists between estate tax and inheritance tax. The estate tax is levied on the representative of the deceased while inheritance tax is levied on the beneficiaries (De Mooij, Ruud, 2005).
Poll tax is a set amount of tax levied per individual regardless of the per capita income. It is one of the earliest forms of taxes in history. However, it's unpopular because it ignores the equity principle and it lead to widespread refusal to pay and cases of civil unrest. Also, sales tax is a tax that is charged when a commodity is sold to its final consumer. It is argued that flat tax rate is regressive because poor people spend high proportions of income than the rich. To counter the said con, food, utilities and other necessities are exempted from sales tax in many countries (Teera, 2002). However, there is a type of a tax known as corporate tax whereby the tax is charged on corporate bodies such as companies, cooperative societies, clubs and trust. It is charged on corporate revenues after allowable deductions (Mihir and Hines, 2003).Custom duty also is a tax that is levied on goods imported through the ports. Goods to charge custom taxes are normally specified in the tax schedule of respective governments. Custom duty can be used to protect the local industries by charging high taxes on imported goods (Crowe, 2005). The other type is the capital gain tax which is the tax that is charged on the profit released upon sale of capital asset. In most cases, the profit is treated as income and subject to the marginal rate of income. However, capital gain may be illusory: if the general prices have doubled over the period in question because of the inflationary pressure, then selling the asset at double price represents no gain (Chu, Davoodi and Gupta, 2000).
