Taxation - Tax Laws

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Revenue productivity and elasticity

It is necessary to look at the tax system as whole and consider the revenue effects of tax that are used. It is tendency for the government expenditure to increase more rapidly than the national income over time. It is highly convenient to have tax system with high revenue elasticity. The revenue yield increases faster than the national income with imposition of new taxes or by increasing the tax rates.

What the government should consider

The government of any other country should consider the taxation of growing economic sectors, taxation of income and the profits, progressive tax rates and taxation of consumption goods that displays high income elasticity of demand.

Classification of taxes

Taxes can be classified depending on the administration collection arrangements and secondly based on the tax rates.

Collection arrangement

The collection arrangement has two classifications and that is direct taxes and the indirect taxes. Example of the direct taxes is the corporate taxes, pay as you earn and withholding tax.

Under direct taxes, the government minimizes the cost of collection and at the same time speeds up the collection process. But thee distinction between the direct and indirect taxes is not always satisfactory or consistent. The tradition is always been the final resting place and that is incidence of tax. If the incidence of the tax the person who bears its impact is a direct tax and if it is passed to the other party then it is indirect party. The distinction is not very easy to maintain because the incidence of the tax is very easy to maintain because the incidence of the tax may shift partly and in some cases fully.

Advantages of the direct taxes

Direct tax has advantages and the disadvantages and each is discussed in this context. Some of the advantages is that direct tax is used to lessen the inequality of income, based on the ability to pay and finally is that the tax payers tend to be more vigilant on how the taxes are used.

Disadvantages of direct taxes

The disadvantages is that they involve elaborate collection arrangements, secondly is that the declaration is necessary evasion is possible, some of the direct taxes have definition problem which include income tax therefore can be manipulated. The direct tax also discourages hard work and encourages tax evasion as well as it discourages foreign investments

Indirect taxes

These are the taxes which are not levied directly to the individuals or the entities. Examples of these are value added taxes, custom and excise duty.

Advantages of indirect taxes

They are easier to collect as compared to direct tax hence it is more convenient. Secondly, the indirect tax is not easy to evade because it is included in the price of products and the services. Also these taxes are easier to define and therefore there is no room for manipulation. The other advantage is that it may lead to savings and less consumptions for example when one wants to buy luxury good.

Disadvantages of indirect tax

There are disadvantages associated with the indirect taxes even though it has several advantages. The disadvantages of the indirect tax is that it is regressive and that it increases the cost of goods

Classification of taxes based on the tax rate

Taxes can be progressive, proportion or regressive depending on the rates used with respect to the given base. The base can be net income of an individual or the value of the property

Progressive tax is the tax whose rate increases in stage so that proportion of income taken away rises as income rises. Thee tax is calculated and adjusted with the decrease and increase of income for example income tax. It is based on the ability to pay and also on social justice and tries to reduce the gap between the poor and the rich and it is discourages the consumption of luxuries commodities

Proportional tax

These are the taxes which the rate does not change with increase in the income. The tax is levied at a flat rate on the income of a person for example 10% is charged at all levels of the income. The person earning more will not have to pay more

Regressive tax

Individuals pay a fixed amount in a year in regressive tax. The higher the income thee lower the taxes levied on the income for example the land rates.

Shifting thee tax incidence

The tax incidence can be forward or backward shifting. Tax may be shifted either through sales transactions of through a purchase production. A producer ask to pay excise duty on his product or force the suppliers to accept lower prices

Theories of tax shifting

The theories of tax shifting try to explain who pays the tax in the final analysis. These theories are concentrated theory which states that it is only those with the surplus that should bear the tax burden. They also stated that if taxes are imposed it will shift to the factor of production and the incidence of tax will shift to the factor of production and the incidence of the tax will rest there.

The second theory of tax shifting is the diffusion theory, this theory states that because of the interdependency of various economic units, the tax imposed will shift to the other sectors of the economy because of the constant interaction of sales and purchases transactions. It is therefore becomes impossible to trace the final incidence of the tax. It assumes the market is efficient and the factors of production can move from one employment to the other

Demand and the supply is another theory which states that the tax incidence can shift only through sales or purchases transactions and through price changes. It will be determined by the demand and supply elasticity. When demand is highly inelastic most of the tax will be borne by the consumer. If the demand is elastic then the tax will be borne by the producers.

How does tax law affect the individual tax payer?

Economic unit upon which the authorities impose tax may not be the ultimate payer of the tax, each economic unit