TAXATION

Chapter 1 GENERAL CONSIDERATIONS REGARDING TAXATION

1.1. The concept of taxation 1.2. General principles of taxation 1.3. The functions and role of taxation

1.1. The concept of taxation

The concepts of "tax", "taxation" and "tax system" appeared at a certain stage in the development of society, to respond to the financial, social and economic needs of the governments. They have been given multiple interpretations, depending on their component elements, on the perception of their role and functions in the economic and social system or in relation to their purpose. Taxation can be defined as the imposition or levying of taxes; the action of taxing or the fact of being taxed (Oxford English Dictionary). A tax is that part of the income or wealth of private individuals, which the authority of the State appropriates in order to provide for the public expenses incurred for the advantage of the general body of taxpayers1 Starting from the definition of taxes as a portion of the income or wealth of individuals and businesses taken by the state to cover public spending, in literature taxation is regarded as: all taxes enforced by laws 2; "a link between the state and individual or legal persons 3; "all taxes imposed in a state, providing a overwhelming part of its revenue, each tax having a specific contribution and a regulatory role in the economy"4

Cossa, L., White, H., Taxation: Its Principles and Methods, BiblioBazaar, LLC, 2008.

2 aguna D.D., Drept financiar i fiscal, Editura Eminescu, Bucureti, 2000, p. 619 3 Tatu L., erbnescu C., tefan D., Vasilescu D., Nica A., Fiscalitate. De la lege la practic, Editura All Beck, Bucureti, 2004, p.1

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Existing theoretical approaches and practical experience lead to the conclusion that taxation defines the system of principles, rules and regulations concerning: taxpayers record and management; setting, recording and settlement of tax liabilities; tax legislation control and solving the taxpayer complaints; taxpayers assistance, for the awareness and correct application of tax legislation.

1.2. General principles of taxation

The process of levying and collection of taxes is a complex one and requires some measures necessary for quantification of taxes imposed to taxpayers, individuals or legal persons, by applying some general principles in order to avoid arbitrariness and prevent relational conflicts between tax authorities and taxpayers. Such principles were first formulated by the famous English economist Adam Smith, who considered that fiscal policy must be based on the following canons: The canon of fairness of taxation, under which the taxation must take into account the taxpayers ability to pay and the size of income; Certainty of taxation canon, which implies that all the taxes to be determined with certainty. In this context, the tax liabilities, tax collection procedures, time and place of payment must be clear and known in advance by the taxpayer, unequivocally, thus eliminating uncertainty and arbitrariness; The canon of tax convenience, according to which taxes should be levied at the time and manner most convenient for taxpayers; The canon of tax efficiency, which requires that tax collections to be made with minimal administration costs. According to the Romanias Fiscal Code, the taxes and fees (charges) are based on the following principles:

4 Hoan N., Economie i finane publice, Editura Polirom, Iai, 2000, p. 169

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a) neutrality of the fiscal measures as regards the various categories of investors and capital, forms of ownership, by ensuring equal conditions for investors and for Romanian and foreign capital. The principle of fiscal neutrality requires equal tax treatment for taxpayers in the same position (horizontal equity) without the socio-economic relevance of their ownership or origin of capital (domestic or foreign). Tax neutrality is seen as a manifestation of nondiscretionary application of tax legislation and the existence of a functional market economy. b) certitude of taxation, by developing clear tax legislation, that do not lead to arbitrary interpretations, while the deadlines, manner and amounts payable are clear for each payer, respectively such payers may follow and understand their tax burden and may determine the impact of their financial management decisions on their tax burden. This principle requires that tax legislation must be clear and concise, so that any interpretations will be avoided. After the determination of the tax liability and its communication to the taxpayer, he/she must be convinced that the size of the tax liability imposed on it is a certainty, in accordance with tax legislation. According to the understanding of the tax liability, taxpayers are planning their resource allocation, rank their priorities and finalize their investment projects. c) fiscal equity among natural persons, by different taxation of incomes based on the size of the incomes. Applying the principle of equity implies differential taxation of income and property in relation to taxpayers ability to pay and the introduction of a tax exemption for certain categories of disadvantaged citizens with low incomes. Applying this principle implies: The existence of a minimum amount of income exempted from taxation; that each taxpayer's tax liability to be settled on the ability to pay, in relation to the income or the value of the property subject to taxation, as well as the personal expenses required for the personal and family maintenance; the same the tax burden for people belonging to the same social category; that the taxation is general, i.e. to include all individuals and legal entities earning income or owning property.

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d) efficiency of taxation by providing long-term stability of the provisions of the Fiscal Code, so that such provisions do not to lead to unfavorable retroactive effects for natural and legal persons, in comparison with the taxation in force on the date when they adopt major investment decisions.

1.3. The functions and role of taxation

Starting from taxes position in the system of public financial resources, we consider that taxation actually performs the same functions as public finances. Compared to the functions assigned to the overall public finance, taxation satisfies: Mobilization of financial resources to the state as tax levies. Taxes, fees and contributions are the typical forms of acquiring financial resources available to the state. The main source of tax levies is the gross domestic product. Much of the GDP is redistributed through taxes. With taxes, the state takes at its disposal some of the revenue made by market participants (wages, rents, profits, dividends payable to shareholders, income of the self-employed). The net income of individuals remaining after paying direct taxes, is still undergoing a process of redistribution through indirect taxes, when purchasing goods and services whose price includes the taxes (excise tax, value added taxes, custom duties). The distribution function, which is reflected by the fact that taxes are used, along with other instruments of fiscal policy, to achieve the distribution of income and wealth among members of society, in accordance with what society considers to be equitable. The social function, which seeks, on the one hand, social protection of individuals whose incomes are far below those considered normal or average, and, on the other hand, encouraging businesses to use the labor from persons with disabilities. The control function, which reflects the taxes capacity to facilitate the fiscal control in different phases of economic reproduction process. The objectives pursued by this function are made by specialized agencies of the Ministry of Public Finance, in particular by the National Agency for Fiscal Administration, or, where appropriate, the specialized departments of local authorities who are empowered to administer
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taxes, fees, contributions or other sums owed to the state general consolidated budget. In line with its functions, the role of taxation is financial, economic and social. 1) The financial role. Is the traditional role, i.e. financing of the government expenditures. In carrying out its functions, the state must obtain the financial resources it needs, objective achieved by promoting the taxation principles. The volume of resources may be increased either by introducing new taxes, or by extending them to a larger number of taxpayers. A tax has a higher yield if the taxation is universal, i.e. payable by all natural and legal persons who earn income of the same type or have the same kind of property, so that all tax base is taxed5. 2) The economic role taxes should serve as instrument for state intervention in the economy. The fiscal policy is intended for developing or restricting economic activity in some areas or sectors of the economy, influencing output growth and/or consumption of goods, increasing exports as well as reducing imports. Stimulating businesses to develop certain activities can be achieved through exemptions from corporate income tax or by allowing them the use the accelerated depreciation of fixed assets. Consumption of certain goods or services is influenced by reducing indirect taxes, when it comes to stimulate consumption and, at the same time, the sectors that produce those consumption goods. A policy of restriction of consumption can be achieved by setting higher tax rates for indirect taxes. Also, stimulating exports and reducing imports, to achieve equilibrium in the trade balance, are priority objectives of fiscal policy, with favorable consequences for the national economy. This policy must be carried out in correlation with incentives for the sector that produces certain goods, thus creating jobs and increasing, consequently, the tax base. 3) The social role. The tax system should provide incentives and deductions for lowincome taxpayers and, on the other hand, should levy high taxes in order to limit the consumption of some harmful products, such as alcohol or tobacco.
Talpo I., Finanele Romniei, vol.I, Editura Sedona, Timioara, 1995, p. 148

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In conclusion, we believe that fiscal policy should optimize the use of tax instruments and procedures with the aim of determining the amount and structure of tax levies, taxable transactions, so that the process of distribution of gross domestic product to provide the resources needed to cover public expenditure.