Lecture 2: Public Finance PDF

Dr. Mona Mahmoud Lecture 2 Definition of Tax Tax is : A financial charge or levy imposed upon a taxpayer (an individual or legal entity) by a state. NOTE THAT :Taxes are one of the biggest sources of income for the government. Taxes can include direct taxes on income, profits, and weal...

Dr. Mona Mahmoud Lecture 2 Definition of Tax Tax is : A financial charge or levy imposed upon a taxpayer (an individual or legal entity) by a state. NOTE THAT :Taxes are one of the biggest sources of income for the government. Taxes can include direct taxes on income, profits, and wealth (e.g. personal and corporate income taxes, property tax), and indirect taxes on consumption goods and services (e.g. Value Added Tax (VAT), sales tax, excise duties.) What is the Difference between Direct and Indirect Tax? A major difference between direct and indirect tax is the fact that while direct tax is directly paid to the government, there is generally an intermediary for collecting indirect taxes from the end - consumer. The responsibility of the intermediary is to pass on the received tax to the government. A direct tax depends on the income of an individual. On the other hand, indirect taxes do not depend on the income of an individual. The tax rate is the same for everyone.  Examples of direct tax are: income tax, capital gains tax, securities transaction tax, perquisite tax and corporate tax Examples of indirect taxes are: sales tax, service tax, custom duty, excise duty and Value Added Tax (VAT) Taxation system Tax system is a set of taxes in force in a country at a given time. In Egypt or any country that has a defective tax system, can it apply an effective tax system applied in another country? Can We Apply Another Tax System that is Effective in Another Country? When talking about a tax system, one must always consider the reality. What applies in a specific country may not apply in another, and What is valid at a specific period, may be invalid at another time. The tax system should imply harmony between taxes and between the fiscal and extra-fiscal objectives of the state. Principles that an Ideal Tax System Should Respect 1. Justice and equity in all taxes. 2. Stability, predictability and legality. 3. Neutrality, i.e. promoting the economy, not affecting (negatively) the decisions of economic operators. 4. Sufficiency in the performance of public functions and services. 5. Comprehensible, simple and easy to apply. 6. Certainty, that is, clear and precise rules. 7. Economical, in the relationship between collection and system administration costs. Taxation System & Government Budgeting Government collects taxes through its taxation system Collecting taxes and fees is a fundamental way for countries to generate public revenues that make it possible to finance investments in human capital, infrastructure, and the provision of services for citizens and businesses. Taxation System & Government Budgeting Common ways to redistribute income and wealth: First, a tax transfer mechanism may be implemented through a combination of progressive taxation of high incomes and transfers (subsidies) in favor of low income households. Secondly, this can occur through the taxation of luxury goods combined with subsidies on goods for the low-income population. Definition of Tax Reform Tax reform can be defined as an initiative that is undertaken solely with the intention of improving the efficiency of the tax system and its administration and for the purpose of maximizing the economic as well as social benefits. Objectives of Tax Reform 1. Decreasing the marginal tax rates 2. Lowering the tax implication 3. Lowering the total number of tax defaulters 4. Increasing the tax revenues 5. Improving economic decision-making 6. Lower the cost involved and time required to organize the tax collection process Tax Reform To tax reform: Firstly, it is essential to make a very good diagnosis of the current system...which means…public revenues and taxes will have to be determined. Secondly, The public spending of the country should be analyzed.  Thirdly, determine a tax expenditure, which is the amount of income that the state ceases to receive, by granting a tax treatment, (for example: exemptions, deductions from the tax base, reduced tax rates.) Why do we do that? Estimating tax expenditures in order to bring transparency to the tax policy, to measure the potential of the tax system, the performance of the administration, and to fight corruption. Fourthly, the tax reform proposal must have a description of the proposed ideal tax system, that is, what the reform is intended to do and where it is intended to go. Tax Evasion Tax evasion is using illegal means to avoid paying taxes. Typically, tax evasion schemes involve an individual or corporation misrepresenting their income. Misrepresentation may take the form either of underreporting income, inflating deductions, or hiding money and its interest altogether in offshore accounts. Tax Evasion as a Means of Corruption No country is immune to corruption. Corruption of public officers can be defined as “abuse of public office for personal gain,” which undermines the trust of the population in the government and the institutions. Corruption undermines the effectiveness and equity of public policies, and embezzles the money of the taxpayers originally intended for schools, roads and hospitals. Tax Evasion as a Means of Corruption When taxpayers believe the state is corrupt, tax evasion becomes more likely. The most corrupt countries collect less taxes, since people pay bribes to avoid them. Tax Evasion as a Means of Corruption Individuals involved in illegal enterprises often engage in tax evasion because reporting their true personal incomes would serve as an admission of guilt and could result in criminal charges. In Egypt as the United States, tax evasion constitutes a crime that may lead to pecuniary sanctions, imprisonment, or both. Reasons of Tax Evasion 1. Existence of tax havens 2. Higher tax rates 3. Lack of integrity 4. Presence of informal economy 5. Lack of simplicity in the tax legislations 6. Inefficiency of tax Tax Evasion & Tax Avoidance Tax avoidance is the legal use of the country’s tax regimes and regulations in order to reduce tax liability by legal means. This includes investing funds in any investment/insurance so that the net amount earned is less and the taxpayer has to pay only a reduced amount as tax. Tax avoidance is completely legal. Conversely, tax evasion is illegal. One way that people try to evade paying taxes is by failing to report all or some of their income. Sometimes people do not report income gained through illegal activities such as gambling and selling stolen goods.