PART II Tax systems and taxes

• A tax system – a set of all the taxes that a

nation imposes;
• Tax systems can be classified in different ways
– Multiple and single tax system
– Direct vs indirect
– Ad Valorem and unit
• Single and Multiple tax systems
• Single tax system is where there is only one
tax in place;
• It is claimed that taxpayers are more certain
of their liabilities in a single tax and this can
help in reducing costs of collection.
• Against this claim note the following
problems:
– identification and choice of an appropriate single
tax,
– the adequacy and growth of revenue,
• One simple form of a single tax is the poll tax, or
the head tax;
• Poll tax is imposed on a person simply because
he/she is there in the society and not because
he/she has an income, or wealth, or is following
any particular trade or profession etc.
• Poll tax is against the principle of equity assessed
in terms of either the benefit principle or the
ability to pay principle.
• It does not enable governments to raise sufficient
amount of revenue;
• Multiple tax system

• A multiple tax system is with several tax

structures being used in the system.
• Any worthwhile tax system in a modern economy
will be a multiple tax system.
• (1) a modern economy is not one-objective
economy. It tries to forge ahead simultaneously
along the paths of growth, equitable distribution
of income and wealth, economic stabilization and
so on.
• Since no single tax can be expected to help the
economy on all fronts, a choice for a multiple tax
system becomes inevitable.
• (2) Income of a modern economy originates
from many sources.
• It would be highly unjust to tax income
originating from any one source and leave out
others.
• Equity would demand that the government
should tax all the important sources of income
in an equitable manner.
• Single (multiple) tax systems are different
from single (multiple) stage taxes;
• Direct vs Indirect taxation
• One way of distinguishing between direct and
indirect taxes has been in terms of the
incidence of taxation.
• Tax incidence and impact
• concerned with the issue of who bears the
burden of taxes;
•
• tax impact – initial burden – is borne by those
who make the payment of taxes to the
government;
• tax impact concerns where the tax first hits;
• tax incidence – ultimate burden – is borne by
those whose real incomes are reduced as a
result of taxes;
• tax incidence concerns its ultimate resting
point;
• Tax impact - legal incidence (statutory
incidence);
• Tax incidence - economic incidence ;
• The initial and final burdens of a tax may be
quite different.
• When the incidence and impact are not at the
same point, the tax is said to have been
shifted.
• shifting burden through changes in prices,
wages and returns on investments.
• Corporations do not actually bear the ultimate
burden of the corporate income tax; instead,
other groups of people bear the burden of the
corporate income tax;
• Not as such easy to identify the incidence of
corporation income tax;
• The burden of corporation income tax is
shifted to other groups of people through
lower income (to employees and investors) or
higher prices (to consumers);
• Businesses as such do not bear the incidence of
any tax. Taxes imposed (i.e, with impact) on
business always result in burdens (incidence)
on people in one of three capacities;
• 1. consumers- to the extent a tax is forward
–shifted, consumers pay higher prices than
they otherwise would to pay and thus have
their real incomes reduced.
•

•
• 2. Workers and other resource suppliers – to
the extent a tax is backward –shifted, workers
and other factors of production receive lower
payments, and thus their real incomes
reduced;
• 3. Business owners – To the extent a tax can
be neither forward- shifted nor backward
shifted, the owners of the taxed business
suffer reduced real incomes;
• the distinction between direct and indirect taxes is
ambiguous;
• most writers define direct taxes as those, which are
imposed initially on the individual or household that
is meant to bear the burden.
• indirect taxes- taxes imposed at some other point in
the system but are meant to be shifted to the final
bearer of the burden.
• such a distinction is not easy to maintain, especially
because in some cases the incidence of the tax may
shift partly and in some cases fully; even in some
other cases the shifting of the burden for the same
tax may vary over time.
• in the case of direct taxes liability is determined with
direct reference to the tax paying ability of the
taxpayer
• in the case of indirect taxes such an ability is
assessed indirectly.
• For example, income tax is a direct tax. Here the tax
paying ability is assessed directly in relation to the
income of the assessee.
• Income tax, gift tax, inheritance tax, wealth tax,
corporation taxes examples of direct taxes.

• excise taxes, sales taxes, VAT (GST) import and

export duties, taxes on rail and bus fares and so on
are in the category of indirect taxes.
• Ad Valorem Vs Unit taxes
• Such a distinction is in terms of the unit of
measurement of the tax base;

• Ad Valorem taxes are when the tax amount is

scheduled according to the value of the item being
taxed;
• the tax automatically gets linked with the value of
the item and would move along with its value;

• i.e., in the period of boom, the tax liability tends to

rise and in times of recession the tax liability also
declines;
• Unit (specific) taxes
• are those imposed on per item or per unit basis;
• use the weight, length and some other unit of
measurement;
• Examples, sales taxes are mostly ad valorem. Excise
duties are sometimes specific, sometimes ad
valorem and some times a combination of the two;
• Direct Vs Indirect taxes (continued)
• the distinction between direct and indirect taxes is
ambiguous;
• most writers define direct taxes as those, which are
imposed initially on the individual or household that
is meant to bear the burden.
• indirect taxes- taxes imposed at some other point in
the system but are meant to be shifted to the final
bearer of the burden.
• such a distinction is not easy to maintain, especially
because in some cases the incidence of the tax may
shift partly and in some cases fully; even in some
other cases the shifting of the burden for the same
tax may vary over time.
• in the case of direct taxes liability is determined with
direct reference to the tax paying ability of the
taxpayer
• in the case of indirect taxes such an ability is
assessed indirectly.
• For example, income tax is a direct tax. Here the tax
paying ability is assessed directly in relation to the
income of the assessee.
• Income tax, gift tax, inheritance tax, wealth tax,
corporation taxes examples of direct taxes.

• excise taxes, sales taxes, VAT (GST) import and

export duties, taxes on rail and bus fares and so on
are in the category of indirect taxes.
• Ad Valorem Vs Unit taxes
• Such a distinction is in terms of the unit of
measurement of the tax base;

• Ad Valorem taxes are when the tax amount is

scheduled according to the value of the item being
taxed;
• the tax automatically gets linked with the value of
the item and would move along with its value;

• i.e., in the period of boom, the tax liability tends to

rise and in times of recession the tax liability also
declines;

• Arguments against Ad Valorem taxes

• Difficult to administer –take custom duties – it is
difficult to determine the value of various goods
imported from several countries
• Once the value is known - the next question might be
whether to use CIF value, local selling price etc.
• Unit (specific) taxes
• are those imposed on per item or per unit basis;
• use the weight, length and some other unit of
measurement;
• Examples, sales taxes are mostly ad valorem. Excise
duties are sometimes specific, sometimes ad
valorem and some times a combination of the two;
• Arguments for unit taxes
• Less chance of tax evasion – tax is imposed based on
units of measurement which are easily ascertainable;
• Easy to administer and collect –once the item is
identified it is easier to administer;
• Arguments against unit tax
• Static revenue yield – it won’t generate large amount
of revenue during periods of price increases;
• Proportional, Progressive and Regressive;
• classification is on the basis of the degree of
progression of a tax.
• uses both tax base and tax rates;
• Tax base and tax rates
• the base of a tax is the legal description of the object
to which the tax applies;
• For example the base of an excise duty is the
production or packing or processing of a specific
good or importation of a specific good;
• the base of an income tax is the income of the
assessee defined in terms of certain rules ;
• Tax rate - the amount of a tax per unit of the tax
base;
• Statutory (nominal)tax rates;
• Effective tax rates;
• Marginal tax rates;
• Average tax rates
• For example,
• If for an income of Br. 10,000 the tax liability is
Br. 1000 and for an income of Br. 11000 the
tax liability is br 1320;
• Average tax rates for the two incomes:
• = br. 1000/Br. 10,000 = 10%
• = Br. 1320/Br. 11,000 = 12%
• Marginal tax rate would be the additional tax
liability Br. 320 divided by additional tax base
namely Br. 1000 i.e., 32%.
• Proportional tax structure
• also called a flat tax system;

• the tax liability increases in the same

proportion as the increase in income;

• the tax rate remains unchanged for each unit

of the tax base;
• Example on proportional tax system
• Tax base(Br) Tax rate(%) Amount of tax (Br)
– 2000 10 200
– 5000 10 500
– 10000 10 1000

• In proportional taxation since by definition the

average tax rate remains unchanged, the marginal
rate always remains equal to the average rate.
• Arguments for proportional tax system include:
– simple in nature;
– uniformly applicable;
• Arguments against proportional tax system
include:

• Inequitable distribution – a system of proportional

taxation would not lead to an equitable and just
direction of the burden of taxation.
• Inadequate resources – proportional taxation means
the tax rates for the rich and poor are the same.
• Progressive structure
• the tax liability as a percentage of income increases
as income increases;

• If the rate rises as the tax base increases, we have

progressive tax;
•
• If the tax rate structure is progressive, then the
marginal rate would be rising as the tax base
increases;

• Further the marginal tax rate would lie above the

average rate of tax.

• Example on progressive tax structure

example progressive tax structure.doc
• Arguments for progressive tax structure
• Reduce the inequality of income and wealth ;

• Revenue productivity
• Stabilizing the economy
• Arguments against progressive tax structure
• Ideal progression is impossible

• Disincentive to work, save and invest

• Regressive tax structure
• the tax liability is a smaller percentage of a
taxpayers’ income as income increases;

• it takes a larger percentage of income from

people whose income is low;
• Example
• Income (Br) tax rate (%) tax payable
(Br)
• 4000 20 800
• 6000 15 900
• 10000 12 1200
• 20000 10 2000
• In regressive tax schedules both the average and the
marginal tax rates fall as the tax base increases;

• marginal tax rate lies below the average tax rate;

• Notes:
• the concept of progressiveness is with reference to
only the money (or money equivalent) burden of a
tax.
• It is not being translated into real burden or the
sacrifice which the taxpayers undergo.
• In terms of sacrifice, for example, a proportional
income tax will be regressive because it would
involve a proportionately greater sacrifice of utility
on the part of the lower income taxpayers.

• depending upon the rate at which marginal utility of

income to taxpayers falls, even a degree of
progressiveness in money terms might turn out to be
regressive in its real burden.
 Taxes on commodities
 These taxes include value added tax (VAT), sales tax,
excise, customs duties etc.

 Value added taxation

 In some countries VAT is referred to as goods and
services tax (GST) like in Australia, New Zealand and
Canada.
 Value added tax is a consumption tax
 Tax on the value added to a product at each stage of
production, paid by each producer/supplier, and
recouped in the sale price of the product;
• 1948 in France;

• Many of African countries introduced VAT in the

1960s and 1970s while many of Asian countries
introduced VAT in the 1980s and 1990s;

• There are over 140 countries throughout the world

that adopted the VAT;
• In Sub-Saharan Africa 33 out of 43 countries in the
region and 9 countries in North Africa have adopted
VAT (Bird and Gendron 2007);

• A few countries that do not have VAT so far include

the USA, Iraq, Iran, and Cuba etc (Bird and Gendron
2007);;

• USA is the only OECD country without the VAT;

• Why adopt the VAT?

• Reasons for countries to adopt VAT:

– the existing sales taxes are unsatisfactory (tax cascade);
– customs union requires discriminatory border taxes to be
abolished;
– a reduction in other taxation is sought;
– the evolution of the tax system has not kept pace with the
development of the economy; or
– Role of international organizations.
• Unsatisfactory sales taxes (tax cascade)

• Sales taxes
• When a taxed product passes from manufacturer to
wholesaler and then to retailer, tax on tax occurs
(cascade tax);

• Many of the early users of VAT switched from

various forms of cascade taxes;
• VAT was developed from ways to mitigate the
disadvantages of the cascade tax;

• For example in France VAT was introduced in an

attempt to mitigate the disadvantages of the cascade
tax;

• As a result, the French government first allowed a

credit for the tax content of purchases of raw
materials against the sales tax liability and second a
credit for the tax content of capital purchases;
• Other causes of dissatisfaction include:
– complexity of administration, and

– the complex and multiple relationship between traders

and government when many taxes are used.

• For example take the case of Korea;

• A reduction of other taxation or to simply increase
revenue

• Some countries look to a VAT not only to replace

existing sales taxes but also to increase revenue;

• For example, much of the debate in the US about

VAT has evolved around the possibility of replacing
the corporate profits tax, reducing the rate of
individual income tax, permitting property tax relief,
financing social security, reducing the payroll tax, or,
more generally, reducing the public sector borrowing
requirement;
•
• The other reason for the spread of VAT has been
caused by the European Economic Community (now
called EU) requiring the adoption of VAT(GST) as a
condition of entry to the common market
environment of continental Europe embracing as
well the UK.

• The main reason for requiring the adoption of VAT

was EU countries contribute from their revenue
raised from their VATs to fund the activities of EU.

• For example, Switzerland and the UK were dragged

to the adoption of VAT simply to enter the EEC (EU)
(Warren et al. 2008);
• Other reason for the spread of VAT to especially
developing and transitional countries is the advocacy
role played by the IMF;

• The IMF – the leading ‘Change Agent’ in tax policy in

many developing and transitional countries (Bird and
Gendron 2007);
• What is value added?
• value that a business adds to the goods and services
that it purchases from others;
• The value that a producer adds to his raw materials
or purchases before selling the new or improved
product or service (Tait 1988);
– –Inputs include raw materials, transport, utilities, etc.
purchased by a firm.
• A business adds value by processing or handling
these purchased items using its own labour force,
machinery and other capital goods (Shoup C 1969;
Warren et al. 2008);

• So value added can be looked at from additive (profit

+ wages) or subtractive (output – inputs) sides (Tait
1988);
• Consider a business with the following accounts
• Sales Br. 200
• Expenses:
– Raw materials 80
– Wages 30 110
• Profit Br. 90
• Value added by this business is Br. 120 – sales (Br.
200) minus costs of raw material, (Br.80);
• Another way to calculate the value added is by
adding profits (Br. 90) and wages (Br. 30);
• Defining the aggregate base of VAT
• At macroeconomic level the total sum of all value
added in an economy (GDP) can be determined in
reference to National Accounts;
• GDP -total sum of all value added in an economy;
(CP+G + IP+G + Exp – Imp)
• In practice, we define VAT base according to how we
treat different types of expenditures for VAT
purposes;
• There are three approaches in defining the base for
VAT;
• Production VAT; income VAT and consumption VAT
• Production type: investment expenditures are not
deductible from the base of the VAT (P-VAT); (CP+G +
IP+G)

• Income type: investment expenditures are first

capitalized and then depreciated as under an income
tax (I-VAT); (CP+G + IP+G - D)
• Consumption type: investment outlays are treated in
the same way as purchases of raw materials and
intermediate products (C-VAT);
• Investment expenditures are excluded/ deducted in
the computation of the VAT base; (CP+G )
• The base of the typical VAT in most countries is
determined under C-VAT (consumption type VAT);

• This is done by allowing the VAT paid on the

purchase of investment goods to be claimed by
businesses as a credit against their VAT liabilities on
outputs immediately;

• The C-VAT is the narrowest of the three potential tax

bases;
• By making different provisions with respect to the
treatment of investment goods, a VAT can be
transformed into three distinct taxes, each of which
has different efficiency effects;
• Methods of calculating VAT base
• For a particular business value added wages + profit
or output – input;
• Four methods Tait (1988);
• 1. Additive direct or accounts method
• t(wages + profit);
• 2. Additive indirect – the value added is not
calculated; instead the tax rate is applied to the
components of value added separately;
• t(wages) + t(profit);
• 3. Subtractive direct – sometimes called business
transfer tax;
• t(Output – Input);
• 4. Subtractive indirect – does not calculate the
value added; instead the rate is applied to the
components of value added separately;
• t(output) – t(input);

• Subtractive indirect – is the invoice credit method; the

original EU model and is used by most countries;
• The four methods produce the same result – the
difference is in their approach;
• Under additive method- profit for the purpose of VAT is
different from the accounting profit;

• Subtraction method- a taxable business calculates its tax

liability by multiplying the difference between taxable
sales and allowable deductions for purchases by VAT
rate;

• Under this method the tax liability is calculated from

purchases and sales figures for each period rather than
from an invoice of each taxable sale;
• Subtractive indirect method – invoice credit method
• Why is this so popular?
• It is transaction based – a technically superior
method since transaction is an easily noted and
tracked event;

• Good audit trail – the invoice credit method creates

a good audit trail since invoices are needed for credit
purposes; one can check the accuracy of the claim
using invoices as evidence;
• The built-in audit trail may sometimes fail:
• 1. On the final consumption transaction since
there is no financial incentive for the final consumer
to collect invoices;
• 2. It fails in connection with exempt or input
taxed goods since there is no credit on these goods
businesses do not have the incentive to collect
invoices;

• 3. It also fails in connection with businesses that

are outside the VAT legislation framework
(including small businesses);
• How do we deal with these problems?:
• As part of the overall compliance and administration
problems, one can use stick and carrot;
• For example, Italy uses stick while Korea and Turkey
use carrot in that they reward consumers, who
collect invoices, on a lottery approach;
• Other methods appear to be difficult to use
• Additive direct and indirect methods are based on
accounts, i.e., profit has to be computed for the use
of these methods;
• Tait (1988) indicated that businesses never
divide inputs by differential taxes (and
maintain accounts accordingly), hence the tax
would have to be a single rate; tax rates – X%
and 0%
• Direct subtractive is not convenient to impose VAT on
monthly basis;
• Although the direct subtractive method would appear to
be the easiest method to calculate value added, it is not
convenient for business to make monthly calculation of
value added in such manner;
• The invoice credit method makes it easier to calculate
value added on any time frame needed by the
legislation;

• Credit method without invoices – Japan uses credit

method that does not rely on invoices;
• difference between the credit invoice method and
Japanese consumption tax is that in Japan, VAT
registered traders can claim credit for implicit tax in
the costs of purchases from suppliers including
exempt sellers (like small traders);
• In the case of invoice credit method, credit cannot be
claimed in respect of purchases from exempt sellers
(no VAT invoice);
• Origin and destination principle
• Deal with the imposition of VAT on transaction that
cross the border;
• Origin principle – allows the taxation of the commodity
in the country of origin (production);
• Allows commodities crossing the border to be taxed in
the country of the exporter;
• Under this principle exports are VATable but not
imports;
• Destination principle -commodities cross the border
VAT free (in the country of export) and subject to VAT
in the country of consumption (destination);
• Many countries use this principle in that exports are
zero rated (VAT free) but imports are taxed;
• Single and Multiple stage VAT

• Single stage VAT- imposes VAT on one level of the

chain in the production process giving credit for taxes
paid on inputs;
• Multiple stage VAT -levies VAT at several stages in the
chain of the production process giving credit for VAT
paid on inputs;

• there are countries that do not tax the retail stage; tax
only manufacturers’ or wholesalers’ stage and leave
the retail stage out of the VAT net;

•
• VAT imposed at the wholesale level or just
manufacturers’ level is considered to be incomplete and
causes various problems including:
• This VAT has much smaller base as the retail stage is not
covered and governments should impose higher rates;
• Businesses are likely to vertically integrate so as to avoid
the tax; like wholesale and retail; manufacturing and
wholesaling;
• So, rules are needed to clearly define wholesale and
manufacturer’s price which in turn are likely to result in
complex tax structure;
• VAT rates
• The rate or rates at which VAT is levied is an important
consideration in the operations of VAT;
• Single and Multiple Rates
• Single rate - VAT system uses only one rate (ignoring
zero rate on exports) while the multiple rates is to a
system having many positive VAT rates;
• A substantial number of countries operate VAT with a
single positive rate while there are a few countries that
use up to four rates.
• In some countries there are different rates for
different regions of parts of the country;
• Tax administrators prefer to use a single rate of
VAT(once again ignoring the zero rate on exports).
• Politicians nearly always think the public will comply
with a VAT more easily if products consumed by
lower income households are taxed at lower rates
than products consumed by the better off;
• The larger the number of VAT rates the more
complicated the tax system and the higher the
administrative and compliance costs of VAT;

• Apart from the complication in the tax system

(increased administrative and compliance costs)
multiple rates are likely to distort consumer and
producers choices;
• International practice
• The generally accepted practice is that VAT should be
imposed with limited number of positive rates;
• Rates vary throughout the world; in the EU they average
between 15% -20% for the standard rate;
• For example, UK and Germany 17.5%, Sweden 25%,
Finland 22%, Greece 18% etc.
• Indonesia 10%, Singapore 3%, Japan 5%, Vietnam 10%,
Ethiopia 15%, Ghana 15%, Kenya 16% (14% reduced
rate) etc.
• VAT free (VAT zero rate)
• When a supply is made VAT free the supplier does
not incur liability on the supply but can claim back
the VAT paid on inputs (input tax is refundable);
• Gives complete relief from the burden of the tax;
• Potential candidates to be zero rated include
exports; Food items and other basic needs;
• There may be a range of commodities that countries
make VAT free; but the advice is to minimize
domestic zero rating;
• VAT exemption (VAT input taxed)
• The supplier is not liable for the VAT on the supply
but cannot claim the VAT paid on the input acquired
(no refund of the input tax);
• This gives only partial relief from the burden of the
tax;
• Exemptions and zero rating are justified:
• Equity consideration;

• There are goods considered to be merit goods including

health, education, books, etc argued to be tax free;

• Existence of sectors that are difficult to tax- like the

financial sector, small businesses etc;
• Exemption of small businesses
• In addition to the equity argument, it is difficult to deal
with a large number of small traders;

• The revenue loss due to exempting this part of the

economy is usually considered to be much less in
relation to the administrative costs;

• In many countries small traders are exempt from VAT;

• Exemption Criteria
• criteria could be turnover, value added, capital
assets, number of employment, number of owners,
profit and type of business;
• In practice, turnover has a wider application;
• From OECD countries the highest threshold is in
Japan (nearly US$300,000)
• Some countries do not have as such registration
threshold – Sweden
• There are some countries that exempt traders such
as individual retailers from the requirement to
register for VAT; Example Spain;
• Excessive use of exemptions is not advisable;
– Exemptions erode the tax base;
– Exemptions make the tax system complex; the existence
of exemptions is likely to increase compliance and
administrative costs as multiple rates do;
– However, reduced rates (multiple rates) are considered to
be “less evil than exemptions” (Bird and Gendron 2007);
– Exemptions break the tax chain and reduce the audit trail
advantage of the invoice credit method;
– Exemptions may not achieve their intended objective of
like equity – take for example public transport;
• Exemptions given at an earlier stage in the production
and distribution chain are likely to increase the effective
taxation; example on problems of VAT exemption.doc
• Standard exemptions (OECD 2001) include transport of
sick or injured persons; hospital and medical care;
human blood; tissues and organs; dental care;
education; non-commercial activities of NGOs; sporting
activities; and cultural activities;

• However, there are departures from these standard

exemptions in various countries;
• Try to make the VAT base as broad as possible;
– Reduce distortions in consumers and producers’ choices;

• Crucial to maintaining a positive image of VAT is:

– the need to keep the base as broad as possible,
– the lines of demarcation for classification as clear as
possible and
– the interface with the tax office by the taxpayers as
minimal as possible;
• VATs in developing countries;
• VATs in developing countries appear to have features
that are quite different from VATs in developed
countries;

• 1. Registration for VAT

• Registration requirements – based on turnover;

• Sector selected registration requirements;

• Voluntary registration is nonexistent or restrictive;

• Other mechanisms include prohibiting VAT
unregistered businesses from participating in
government auctions;

• 2. VAT rates
• Some developing countries have multiple rates against
the usual advice for a single positive rate;

• For example Kenya, Lesotho, Mali have more than one

positive rate (multiple rates);

• Some developing countries zero rate domestic

transactions apart from exports Eg Kenya;
• 3. VAT exemptions

• Exemptions are given for instance in Kenya on food

items, financial services, education, medical services,
etc.;
• Developing countries such as Kenya tend to have a very
long list of exempted goods and services;

• 4. VAT refunds

• Many developing countries try to give refunds to

exporters;
– For non-export businesses many countries require
the net credit (refund) claim to be carried forward
and offset against future VAT liabilities;

– Other refund management schemes include using

vouchers by coffee exporters (Ethiopia) and requiring
claimants to produce documents verified by CPAs
(Kenya);

– Developed countries - mostly refunds are made

immediately;

– Example New Zealand;

• 5. Accounting and reporting

• In most developing countries there is no room to

accommodate the capacity and size of businesses;
• Accrual basis of accounting mostly in use again with no due
consideration of the compliance costs burden of VAT on
small businesses;

• require monthly filing of VAT returns regardless of the size of

businesses;
• Excise taxes

• Excises are taxes levied on particular products with

discriminatory intent;
• “levied on particular products, or on a limited range
of products… (that) may be imposed at any stage of
production or distribution and may be assessed by
reference either to the weight, strength, or quality of
the product, or by reference to the value” (IMF 1974,
p. 166);
• Excises are imposed to add to the progressivity of
the tax structure and also to discourage bad habits;
• Excise taxes are imposed traditionally on four groups
of products such as alcohol, tobacco, petroleum
products and automobiles;

• Other excisable goods include electricity, gas,

telecommunication, electric household appliances
etc;
• The consumption of these goods generally rise with
the increase in household income –adds to
progressivity;
 Trade taxes

Why Trade Taxes ?

• Good tax handle, easy administration,

• Import duties used as policy instrument to

induce economic development through import
substitution.
• Major economic impacts:
– foreign exchange saved,
– but contract trade and distort sectors –
typically favors capital over labor intensive
sectors.

• Now more an instrument of trade policy

in industrial countries, than a revenue
source:
• Wealth taxes
• income and consumption are associated with a time
dimension;
• the concept of income would be meaningful when it
is put in the context of some time interval;
• income and consumption are known as flow
variables;
• A stock variable is a quantity at a point in time, not a
rate per unit of time;
• Wealth is a stock because it refers to the value of the
assets an individual has accumulated as of a given
time;
• Wealth taxes are imposed on stock of assets one has
accumulated;
• Taxes levied on the ownership or the transfer of
ownership in property;
• Properties can be divided into real property and
personal properties;
• real properties- land and anything attached to land;
• Personal properties - anything moveable.
• Real property is the leading base for wealth taxes;
• Personal property taxes are collected on registered
vehicles including motor vehicles, trailers, planes,
and boats;
• Property taxes are imposed on the holding of
certain properties;
• Estate and gift taxes are imposed on the
transfer of wealth;
• Estate and gift taxes are levied at irregular
intervals on the occurrence of certain events;
• the estate tax (inheritance tax) on the death
of the wealth holder;
• gift tax when property is transferred between
the living;
• Why tax wealth?
• 1. Wealth taxes help to correct certain problems that
arise in levying a comprehensive income tax;

– By taxing wealth of which unrealized gains become a part,

the problem in income taxation may be remedied;

• 2. The higher an individual’s wealth, the greater his

or her ability to pay, other things including income
being the same; enhance the ability to pay principle;
• 3. Wealth taxation reduces the concentration of wealth,
which is undesirable socially and politically;

• 4. Wealth taxes may be considered as payments for

benefits that wealth holders receive from government;

• One might argue, for example, that a major goal of

defense spending is to protect our existing wealth (from
foreign enemies) ;
• Tax administration
• Tax policy and administration
• Tax policy and tax administration are the means by
which governments raise revenue to finance spending
on public goods and services.
• Tax policy – the choice of tax instruments
• Tax administration – the implementation of tax policy.
• “Policy change without administrative change is
nothing…” Milka Casanegra, 1992
• Tax administration involves several activities:
– Tax assessment, collection, taxpayers registration,
– It also deals with issues of resources available to
the authority, the organizational structure used,
who should administer the various types of taxes
etc
• Tax assessment
– Official (administrative) assessment
– Self assessment
• Self-assessment
• A system where taxpayers comply with their basic
tax obligations without the involvement of tax
officials;
• Tax officials provide taxpayer with information and
education;
• Taxpayers complete their return accurately and
submit them voluntarily with their payments
• Failing that, enforcement actions are taken and
penalties applied
• Expected to enhance voluntary compliance
• Voluntary compliance through self assessment
is based on the idea that:
– Tax administrations have limited resources; and
– Taxpayers have the best information about their
tax liabilities.
• Conditions for self assessment
• Simple and stable tax law.
• Good services to taxpayers.
• Simple filing and payment procedures.
• Selective risk-based audit programs.
• Fairly applied penalties.
• Fair and timely dispute resolution.

• Assessment using books; Estimated

assessment; Standard assessment
• Presumptive taxation
• Presumptive taxation is the application of
indirect means to ascertain tax liability;
• A presumptive income tax is based on some
measure of economic activity that surrogates
for the tax base, rather than the actual tax
base (taxable income itself);
• Presumptive taxation is employed mainly in
countries where hard – to –tax taxpayers
comprise the majority of the population and
administrative resources are scare;
• In these countries most taxpayers lack financial
transparency (proper books) that allows for effective
taxation by the government;
• In developing countries most taxpayers especially
small ones do not have the resources needed to
maintain proper books of accounts;
• They appear lacking the capacity to navigate complex
tax codes;
• In these situations, presumptive taxation may be the
most appropriate method of tax administration for
specific groups of taxpayers;
• Presumptive taxation uses a variety of alternative
means of determining the tax base and assessing the
tax liability;
• 1. Estimate of income using factors like type of
profession, number of employees, resources used
etc;
• 2. Using assets:- Commercial property, business
vehicles;
• 3. Using turnover or gross receipts, purchases and
wages;
• 4. External indicators of income: personal wealth;

• Standard assessment – standard assessment assigns

lump-sum taxes to taxpayers on the basis of occupation
or business activity;
• Standard assessment does not take into account
taxpayer- specific conditions, such as family size or
losses in a particular year;
• As a result it can be regressive by imposing equal tax on
individuals in the same category with different incomes.
• Estimated assessment
• Required to keep books but fail to do so
• Each taxpayer’s income is individually estimated
based on indicators like proxies of wealth specific to
a given profession or economic activity;
• Takes individual circumstances (like loss in a given
year) into account ;