Meaning of Taxation
Taxation refers
to the practice of government collecting money from its citizens to pay
for public services. or A means by which governments finance their
expenditure by imposing charges on citizens and entities. Without taxation,
there would be no public Expenditures. One of the most frequently
debated political topics is taxation. Taxation is the practice of
collecting taxes (money) from citizens based on their earnings and
property. The money raised from taxation supports the government and
allows it to fund police and courts, have a military, build and maintain
roads, along with many other services. Taxation is the price of being a
citizen, though politicians and citizens often argue about how much
taxation is too little or too much.
The Purpose of Taxation
Explain the purposes of taxation
What are the objectives of Tax
concept of tax was initiated with a view to generate government revenue
in its very beginning stage. In course of time it has been utilized for
various purposes.
  • To raise government revenue for development and welfare programmes in the country.
  • To
    maintain economic equalities by imposing tax to the income earners and
    improving the economic condition of the general people.
  • To encourage the production and distribution of the products of basic needs and discourage the production and harmful ones.
  • To discourage import trade and protect the national industries
The Principle of Taxation
Mention the principle of taxation
the major objectives of taxation are to be achieved, taxes should
conform to certain criteria. These are summarized in the following
  • The principle of simplicity;This
    is Ability of the taxpayer to understand. The principle of simplicity
    is one of principles of taxation and it advocates that Tax system should
    be plain, simple to understand by the common taxpayers. It should not
    be complicated to understand how to calculate and ultimately ascertain
    how much to be paid. This principle of taxation is so important in that
    it helps in avoiding corruption as well as exploitation by the taxing
  • The principle of convenience; This
    principle emphasizes that both time and manner in which payments are
    executed should be convenient to the taxpayer. An Economist by Names of
    Adam Smith said that `Every Tax ought to be levied at the time or in the
    manner in which it is most likely to be convenient for the contributor
    to pay’. For instance the payment of Value Added Tax and Excise duty by
    the consumer is very convenient because the consumer pays the Tax when
    he buys the commodities at the time when he has the means to buy the
    product. Furthermore, the manner of payment is also convenient because
    these Taxes are inclusive in the prices of the commodities
  • The principle of certainty;
    According to Adam Smith, there should be certainty in taxation because
    uncertainty creates favourable climate for tax evasion hence
    compromising with the Taxation objectives. By this principle, it means
    that, the tax which each individual taxpayer is bound to pay should be
    certain. The time, the manner of payment and the amount to be paid must
    be clear to the taxpayer. Thus, this requires that there should be no
    element of arbitrariness in a tax. It should be in relation to
    ascertaining as to when, what and where the tax is to be paid.
  • The principle of Equality;Taxes
    should be allocated among individuals fairly and reasonably. In
    taxation systems, the principle of equality is considered as the most
    important. As Adam smith put it forward `The subjects of every state
    ought to contribute towards the support of the government as nearly as
    possible in proportion to their respective abilities’
    . This implies
    that every person should pay the tax according to his ability and not
    the same amount. It further means that every taxpayer should not pay at
    the same rate; rather every taxpayer should pay the tax proportion to
    his income of the taxpayer.
Types of Taxation (Direct and Indirect)
Identify types of taxation (direct and indirect)
What are the Different Types of Tax with Examples
Taxes may be categorized into different as their nature as direct taxes, indirect taxes.
  • Direct Tax;
    A direct tax is the one, which is paid by the person or entity on whom
    it is legally imposed. It is collected from the persons or entities on
    the income they have earned exceeding a certain specified limit. Tax is
    generally calculated at a certain percentage on the income. Income tax,
    corporate tax, land revenue tax etc. are the examples of direct tax.
  • Indirect Tax;
    An indirect tax is the one, which is imposed to one person or entity
    but paid partly or fully by others. It is transferable to others. The
    tax is collected from customers by including it in the price of the
    goods or services they have purchased. The producers collect such a tax
    from wholesalers the wholesalers from retailers and the retailers from
    the final consumers. Excise duty, custom duty, VAT etc. are some of the
    examples of indirect tax.
  • Value Added Tax (VAT);Value
    added tax is the tax levied on value added on the price of the product
    at each stage of production, and or distribution activities. Value added
    is the difference between sales values and purchase value or the
    conversion cost plus profit. Conversion cost means the expenses on rent,
    depreciation, maintenance, insurance, salary etc. It is imposed on the
    goods at import, production and selling stages.
Difference between the Different Systems of Taxation
Distinguish between the different systems of taxation
Taxes on Income
The federal government, 43 states and many local municipalities levy income taxes
on personal and business revenue and interest income. In most cases,
income tax brackets are progressive, meaning that the greater the
income, the higher the rate of taxation. Federal rates for the 2013 tax
year range from 10 to 39.6 percent. State and city rates are generally
much lower. In addition, many systems allow individuals to trim their
tax bill with various credits, deductions and allowances. Businesses pay
taxes on their net income, that amount can be taken as an
above-the-line business deduction on a person’s income tax return.
Capital gains taxes
are those paid on any profits made from the sale of an asset and are
usually applied to stock and bond transactions. The capital gains tax
rate has recently been raised from 15 to 20 percent. Profits made from
the sale of real estate are also subject to a capital gains tax. Single
homeowners may exclude up to TSH 250,000 of capital gain on the sale of a
home, as long as the home was a principal residence for at least two of
the five years before the sale; married couples filing jointly can
exclude up to TSH500,000.
Estate taxes
are imposed on the transfer of property upon the death of the owner.
They were created to prevent the perpetuation of tax-free wealth within
the country’s most affluent families. Since the tax exempts the first
$5.43 million of an estate’s worth, estate taxes only affects about 1
percent of the citizenry. The maximum top estate tax rate is 40 percent.
Many states also impose their own estate tax, sometimes known as an inheritance tax.
Opponents of these types of taxes believe that they are an unfair
confiscation of wealth passed on to an heir and call them “death taxes.”
A tax related to the estate tax, and assessed in a similar manner, is
the gift tax, levied on a transfer of wealth during a person’s lifetime. The first $14,000 of a gift is excluded from the tax.
Taxes on Property
Property tax,
sometimes known as an ad valorem tax, is imposed on the value of real
estate or other personal property. Property taxes are usually imposed by
local governments and charged on a recurring basis. For example,
homeowners will generally pay their real estate taxes either once a year
or as a monthly fee as part of their mortgage payments.
Real estate taxes
are often subject to fluctuation based upon a jurisdiction’s assessment
of the worth of a property based on its condition, location and market
value, and/or changes to the amounts apportioned to various recipients
of the tax. For example, if residents of a community have voted to
increase the millage rate (the amount per $1,000 that is used to
calculate taxes) for a school system, homeowners could see an increase
in the tax levied on their properties. Conversely, if property values
have fallen due to adverse economic circumstances, home taxes may
items that may be subject to a property tax are automobiles, boats,
recreational vehicles and airplanes. Some states also tax other types of
business property such as factories, wharves, etc.
Taxes on Goods and Services
The sales tax
is most often used as a method for states and local governments to
raise revenue. Purchases made at the retail level are assessed a
percentage of the sales price of a particular item. Rates vary between
jurisdictions and the type of item bought. For example, a pair of shoes
may be taxed at one rate, restaurant food at another, while some items,
like staple commodities bought at a grocery store, may not be taxed at
all. Also, the same shoes may be taxed at a different rate if sold in a
different state or county.
believe that sales taxes are the most equitable form of taxation, since
they are essentially voluntary and they extract more money from those
who consume more. Others believe that they are the most regressive
form of taxation, since poorer people wind up paying a larger portion
of their income in sales taxes than wealthier individuals do.
Excise taxes
are based on the quantity of an item and not on its value. For example,
the federal government imposes an excise tax of 18.4 cents on every
gallon of gas purchased, regardless of the price charged by the seller.
States often add an additional excise tax on each gallon of fuel.
User fees
are taxes that are assessed on a wide variety of services, including
airline tickets, rental cars, toll roads, utilities, hotel rooms,
licenses, financial transactions and many others. Depending upon where
someone lives, a cell phone, for example, may have as many as six
separate user taxes, running up the monthly bill by as much as 20
sin taxes are imposed on items like cigarettes and alcohol. Luxury
taxes are imposed on certain items, such as expensive cars or jewelry.
The Meaning of Progressive, Proportional and Regressive Taxation
Define progressive, proportional and regressive taxation
Types of Tax Structures
are three general ways that a government can apply tax rates. Taxes can
be levied on a regressive basis, a progressive basis or proportional
basis. Let’s take a closer look at each of these tax structures.
Regressive Tax Structure
regressive tax structure
results in low-income individuals paying a higher percentage of their
income on taxes than high-income individuals. A regressive tax structure
tends to shift the burden of taxation to the poor.
a government defines the income subject to a particular tax rate or
schedule is also important. For example, the United States government
treats earned income differently than investment income and gives
investment income a preferential tax rate. In other words, the
government imposes a higher rate of tax on income earned through wages
and salary than on income earned on investments. That’s why Warren
Buffett pays a lower rate of income tax than the average American
household – most of his income is from investment activities, not from
his labor.
Progressive Tax Structure
  • progressive tax structure
    is the opposite of a regressive tax structure. In a progressive tax
    system, taxpayers making more money pay higher tax rates than those
    making less money. The United States uses a progressive income tax
    structure because it taxes earned income at progressively higher rates
    as earned income increases. A progressive tax structure tends to shift
    the burden of taxation to the wealthy.
Proportional Tax Structure
  • In a proportional tax structure,
    the tax rate does not depend upon the relative income level of the
    taxpayer. You can think of a proportional tax rate as a flat tax. A
    common example of a flat tax in the United States is a sales tax. The
    poorest member of society pays the same sales tax on a television as the
    richest. A proportional tax system theoretically should create an equal
    tax burden for all taxpayers, but some argue it doesn’t.
The Advantages and Disadvantages of Direct and Indirect Tax
Describe the advantages and disadvantages of Direct and indirect Tax
revenue refer to the income generated by the government through various
income sources inside and outside the particular government, As to any
other person one will be eager to know where government earn money to
finance its activity as well as expenditure of the government. The
following are the source of revenue of various government including
united republic of Tanzania (URT) :-
  • TAXATION ,Like
    we have discussed in the previous tutorial that taxation is a
    compulsory levy imposed by the government whereby no direct benefit
    citizen will receive from the government,The levy is usually payable by
    citizen at different rate depending on the nature of economic activity
    conducted by an individual or firm the obtained amount is
    the revenue for the government and is used to meet various expenditure
    causing taxation to be the first source of government revenue.
  • FEES,These
    are payment made by users of public services on government cost sharing
    in health and education,That is to say the payment made by user of
    public services i.e health and education is not the actual cost that
    they were required to pay rather than contribution on cost already
    payable government.
  • FINES,Refer to the
    penalties imposed by government against law breaches,i.e any person or
    firm which had been proved guilt by law must be exposed to specific fine
    as the compensation for the destruction made by a person or firm and
    the collected amount being the revenue for the government
  • GRANTS,Refer
    to non-payable money provided by the government to another government
    with the aim of helping such government either to improve or to start a
    project which are of great importance.to the society of such government.
    government may decide to invest beyond its boundary provided there is a
    proof for sustainable and profitable cash flow,the obtained amount
    after operation being the revenue for particular government.
Advantages Of Direct Tax
  • Direct tax is equitable as it is imposed on person as per the property or income.
  • Time, procedure and amount of tax paid to be paid is known with certainty.
  • Direct tax is elastic. The government can change tax rate with the change in the level of property or income.
  • Direct
    tax enhances the consciousness of the citizens. Taxpayers feel burden
    of tax and so they can insist the government to spend their
    contributions for the welfare of the community.
Disadvantages Of Direct Tax
  • Direct tax gives mental pinch to the taxpayers as they have to curtail their income to pay to the government.
  • Taxpayers feel inconvenience as the government impose tax progressively.
  • Tendency to evade tax may increase to avoid tax burden.
  • It is expensive for the government to collect tax individually
2. Indirect Tax
indirect tax is a tax imposed on one person but partly or wholly paid
by another. In indirect tax, the person paying and bearing tax is
different. It is the tax on consumption or expenditures. Examples of
indirect taxes are:
  • VAT
  • Entertainment Tax
  • Excise Duty
  • Sales Tax
  • Hotel Tax
  • Import And Export Duty etc.
Advantages Of Indirect Tax
  • Indirect tax is convenient as the taxpayer does not have to pay a lump sum amount for tax.
  • There is mass participation. Each and every person getting goods or services has to pay tax.
  • There is a less chance of tax evasion as the taxpayers pay the tax collected from consumers.
  • The government can check on the consumption of harmful goods by imposing higher taxes.
Disadvantages Of Indirect Tax
  • Indirect tax is uncertain. As demand fluctuates, tax will also fluctuate.
  • It is regretful as the tax burden to the rich and poor is same.
  • Indirect tax has bad effect on consumption, production and employment. Higher taxes will reduce all of


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