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TAXATION

nothing is certain, but death and taxes. B. Franklin

 What difference is there between taxes and theft? What justifies any taxation? What right does the government have to take some of our money? What right does the government have to tax at all? Why should the government get any part of the profit from selling something I own? What's the best tax scheme?

History
During the reign of Egyptian Pharaohs
Scribes as tax collectors

 The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first dynasty of the Old Kingdom. The earliest and most widespread form of taxation was the corve and tithe. The corve was forced labour provided to the state by peasants too poor to pay other forms of taxation (labour in ancient Egyptian is a synonym for taxes). .

 Records from the time document that the pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. Other records are granary receipts on limestone flakes and papyrus.

 During one period the scribes imposed a tax on cooking oil. To insure that citizens were not avoiding the cooking oil tax scribes would audit households to insure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil.

 Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24 - the New International Version), it states "But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children".

 In the Quran People are merely entrusted with wealth for their livelihood in this world. They are allowed to hold property and enjoy the benefits so long as they understand that they are holding the property in trust and they must follow the Gods rule.

 believe in Allah and His Messenger, and spend of that whereof He hath made you trustees and such of you as believe and spend (aright), theirs will be a great reward. (57: 7). Also and bestow upon them, of the wealth of Allah which he hath bestowed upon you. (24:33).

History
In Greece
A tax referred to as Eisphora was imposed only in times of war. No one was exempt from the tax which was used to pay for special wartime expenditures. However, rescinded the tax once the emergency was over. When additional resources were gained by the war effort the resources were used to refund the tax

History
In Athens
A monthly tax called Metoikon was collected to foreigners . poll tax on foreigners, people who did not have both an Athenian Mother and Father, of one drachma for men and a half drachma for women.

 Earliest taxes in Rome

Taxes known as Portoria were customs duties on imports and exports Caesar Augustus was consider by many to be the most brilliant tax strategist of the Roman Empire. During this period cities were given the responsibility for collecting taxes. Caesar Augustus instituted an inheritance tax to provide retirement funds for the military. The tax was 5 percent on all
inheritances except gifts to children and spouses.

 During the time of Julius Caesar a 1 percent sales tax was imposed. During the time of Caesar Augustus the sales tax was 4 percent for slaves and 1 percent for everything else.1

 In England
The first tax assessed in England was during occupation by the Roman Empire Taxes were first used as an emergency measure When Rome fell, the Saxon kings imposed taxes, referred to as Danegeld, on land and property. The kings also imposed substantial customs duties. Taxes on income or capital were a recent development as a result of increasing

 In India, Islamic rulers imposed jizya (a poll tax on nonMuslims) starting in the 11th century. It was abolished by Akbar.

TAX REVOLT
Because taxation is often perceived as oppressive, governments have always struggled with tax noncompliance and resistance. Indeed, it has been suggested that tax resistance played a significant role in the collapse of several empires, including the Egyptian, Roman, Spanish, and Aztec.

 One of the most famous events in American Colonial history was the Boston Tea Party, an incident where colonists dressed up like Indians and threw barrels of tea off ships into Boston harbor to protest levies imposed on the popular commodity.

 In 60 A.D. Boadicea, queen of East Anglia led a revolt that can be attributed to corrupt tax collectors in the British Isles. Her revolt allegedly killed all Roman soldiers within 100 miles; seized London; and it is said that over 80,000 people were killed during the revolt. The Queen was able to raise an army of 230,000. The revolt was crushed by Emperor Nero and resulted in the appointment of new administrators for the British Isles.1

 Lady Godiva Lady Godiva was an Anglo-Saxon woman who lived in England during the 11th century. According to legend, Lady Godiva's husband Leofric, Earl of Mercia, promised to reduce the high taxes he levied on the residents of Coventry when she agreed to ride naked through the streets of the town.

 The 100 years War (the conflict between England and France) began in 1337 and ended in 1453. One of the key factors that renewed fighting in 1369 was the rebellion of the nobles of Aquitaine over the oppressive tax policies of Edward, The Black Prince.

 In Modern Industrial Nations

The government designates a tax base (such as income, property holdings, or a given commodity) A Tax Law is a body of rules passed by the legislature by which the government acquires a claim on tax payers to convey, transfer and pay to the public authority

Effects of Taxation
Personal Income Tax which is presumed to fall entirely on the legal taxpayers influences decisions to work, save, and invest. These decisions affect other people. Corporate Income Tax may simply result to lower corporate profits and dividends. It may reduce their income of all owners of property and businesses. The company may move toward raising the prices of their products

Definition
The system of compulsory contributions levied by a government or other qualified body on people, corporations and property in order to fund public expenditures. An inherent power of the state to raise income and to demand enforced contributions for public purposes.

 the process by which the sovereign country, through its law making body, raises revenue to defray the necessary expenses of the government

 Taxation is much more commonly felt to be exploitative and arbitrary in dictatorships, where citizens have no little or no voice in deciding on economic or other policies.

ESSENTIAL CHARACTERISTICS OF TAX

It is an enforced contribution
Tax is not a voluntary payment or donation Its imposition is no way dependent upon the will or assent of the persons tax

It is generally payable in money

It is an exaction to be discharged alone in money which must be in legal tender

It is proportionate in character
It is ordinarily based on the ability to pay

It is levied on persons or property

Tax may be imposed on acts or transactions or contracts

It is levied by the state which has jurisdiction over the person or property
The persons or property must be subject to the jurisdiction of the taxing state

It is levied by the law making body of the state

The power to tax is a legislative power which only the legislative body can exercise through the enactment of statutes or ordinances

It is levied for public purposes

Taxation and tax involves a charge or burden imposed to provide income for public purposes

It is inherent in sovereignty
The power of taxation is inherent to sovereignty by being essential to the existence of every government

It is legislative in character
Under the Constitution only legislative body can impose taxes Power to tax is also granted to local government subject to limitations

Why do governments impose taxes?

Raising money for government spending. The most obvious reason is to raise money for all the expenditure that is required so that persons can live in a civilized society. Hospitals, schools, the defense system, the welfare state; these things do not come cheaply. Local taxes also have to be levied to help pay for libraries, cleaning the roads, local parks and the local council administration to name just a few items.

Taxes Fund Public Goods and Services

Health Care for Elderly

National Defense
Social Services

State and Local Police Financial Aid

Public Education

The Economics of Taxation

taxes also impact the economy in the following ways:
Resource allocation - if taxes are too high, supply will decrease and /or prices will increase causing a shift in the allocation of land, labor and capital. Behavior adjustment - sin taxes, such as those placed on cigarettes attempt to change a persons behavior Productivity and Growth - if taxes are too high, there is less incentive for people or businesses to continue to grow. Why earn more if most of it is taken away in higher taxes? Correct negative externalities

TWO PRINICPLES of TAXATION

Who pays What is based on two principles: Benefit Principle The more you benefit from something, the more you should pay. Taxes on gasoline Ability to Pay - The more you make the more you should pay.

BASIC PRINCIPLES OF SOUND TAX SYSTEM

Fiscal adequacy
The sources of revenue should be sufficient to meet the demands of public expenditure

Equality or theoretical justice

The tax burden should be proportionate to the taxpayers ability to pay

Administrative feasibility
Tax laws should be capable of convenient , just, and effective administration

Characteristics of a sound Tax system

Fairness Clarity and Certainty Convenience Efficiency

 Fairness. A tax should always consider the taxpayers' 'ability to pay'. and equity (concerned with the distribution of income) Certainty. The timing, method and amount due should be absolutely clear. There should be no excuses for tax evaders

 Convenience. It should be as easy as possible for the taxpayer to pay the tax (in terms of means and timing of payment). Note that the Pay As You Earn (PAYE) method of tax collection on most peoples' income is very good here.

efficiency(concerned with the allocation of resources)

Principles of Tax and Policies

Other principles relate to the cost of operation of the tax system Cost. The cost of collection (for the government) should not be too high. In particular, the cost should be a relatively small proportion of the tax yield. The costs of operation are divided into two types - administrative costs and compliance costs.

Principles of Tax and Policies

Administrative costs are the costs to the government (and ultimately to the taxpayer) of collecting tax revenue. Thus they include the costs of enforcing tax rules and attempting to catch and to prosecute people breaking tax rules. The more complex a tax system is, the more easily can experts find their way around the rules. The more difficult it then becomes for the tax authorities to tighten the rules to try to ensure that people cannot avoid making the tax payments which the government thinks they should.

Principles of Tax and Policies

Compliance costs, on the other hand, are the costs (other than the taxes themselves) of making tax payments to the government.

AICPA No 1
Basic concept by which a government is meant to be guided in designing and implementing an equitable taxation regime. (1) Adequacy: taxes should be just-enough to generate revenue required for provision of essential public services. (2) Broad Basing: taxes should be spread over as wide as possible section of the population, or sectors of economy, to minimize the individual tax burden. (3) Compatibility: taxes should be coordinated to ensure tax neutrality and overall objectives of good governance.

 (4) Convenience: taxes should be enforced in a manner that facilitates voluntary compliance to the maximum extent possible. (5) Earmarking: tax revenue from a specific source should be dedicated to a specific purpose only when there is a direct cost-andbenefit link between the tax source and the expenditure, such as use of motor fuel tax for road maintenance. (6) Efficiency: tax collection efforts should not cost an inordinately high percentage of tax revenues

 (7) Equity: taxes should equally burden all individuals or entities in similar economic circumstances. (8) Neutrality: taxes should not favor any one group or sector over another, and should not be designed to interfere-with or influence individual decisions-making. (9) Predictability: collection of taxes should reinforce their inevitability and regularity.

 (10) Restricted exemptions: tax exemptions must only be for specific purposes (such as to encourage investment) and for a limited period. (11) Simplicity: tax assessment and determination should be easy to understand by an average taxpayer.

Tax Evasion
When there is fraud through pretension and the use of other illegal devices to lessen ones taxes, there is tax evasion
Under-declaration of income Non-declaration of income and other items subject to tax Under-appraisal of goods subject to tariff Over-declaration of deductions

Tax Avoidance
Is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax avoidance. Latterly the term has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law.

Direct and indirect taxes

A direct tax is one that is paid directly by the individual worker or firm. Income tax is the best example, usually being paid directly through PAYE. Firms pay corporation tax on their profits, which is a bit like an income tax for business. Others include Capital Gains tax, Inheritance tax, Stamp duty (paid when buying a house)

Direct and indirect taxes

An indirect tax is one that is only paid indirectly through a third party. Consumers pay Value Added Tax (VAT), for example, but only if they actually buy the good or service in question. The retailer officially pays the tax, although it is likely that the price is raised to reflect the tax, so, effectively, the consumer ends up paying. Others include tobacco and alcohol duties, fuel duties (on petrol).

IslamicTax and Policies

what are the Islamic taxes? What philosophy they subscribe to? What aims and policies do they pursue? What outcome do they seek? What are their impacts? What are their institutional requirements? Can they be integrated into modern tax policy and systems? Are they subject to changes and revisions?

CLASSIFICATION OF TAXES
AS TO SUBJECT MATTER Personal, poll or capitation
Tax of a fixed amount imposed on individuals, residing within specified territory, whether citizens or not, without regard to their property or the occupation in which they may be engaged. Example: community tax

Property
Tax imposed on property, whether real or personal, in proportion either to its value or in accordance with some other reasonable method of apportionment Example: real estate tax

Excise
Any tax which does not fall within the classification of a poll tax or property tax. Example: value-added tax, income tax

SCOPE
National
Tax imposed by national government Example: national internal revenue taxes

Municipal or local
Tax imposed by municipal or public corporations Example: real estate taxes

Specific
Tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement Example: excise taxes on wines, cigars, gasoline

Ad valorem
Tax of a fixed proportion of the value of the property with respect to which the tax is assesed Example: real estate tax, value-added tax

Types of Taxes
Taxes are classified according to the pay in which the tax burden changes as income changes. Proportional Tax Progressive Tax Regressive Tax

Types of Taxes
Proportional
Tax based on fixed percentage of the amount of property, income or other basis to be taxed Example: real property tax

Proportional Taxes
Regardless of Income, the same tax rate is imposed upon everyone. Another term for a proportional tax is a flat tax. If there is a 20% flat tax, how much do you pay in taxes if you earn $10,000? What if you earn $100,000? Note as a persons income increases, the percentage of total income paid in taxes remains the same.

Proportional Tax

40%

20%
Tax Rate

10%

10,000 50,000 100,000

Income

Types of Taxes Progressive or graduated

Tax based on the rate of which increases as the tax base or bracket increases Example: income tax

Progressive Tax
People with higher incomes pay a higher percentage in taxes. Federal and State income tax are progressive taxes. Simple the more you make the more they take

INCOME

Amount Paid Amount Paid in Taxes as a percentage of Income $1,000 $ 10,000 $ 30,000 10% 20% 30%

$10,000 $50,000 $100,000

Progressive Tax

40%

20%
Tax Rate

10%

10,000 50,000 100,000

Income

Types of Taxes Regressive

Tax base on the rate of which decreases as the tax base or bracket increases

Regressive Taxes
The lower the income the higher percentage paid in taxes. Sales tax is an example of a regressive tax. Assume two families paid $1000 in sales tax by the end of the year. Which family spent a higher percent of their income on taxes? Income Amount paid Amount paid in taxes as a in taxes
percentage of their income.

$10,000 $50,000

$1000.00 $1000.00

10% 5%

Regressive Tax

40%

20%
Tax Rate

10%

10,000 50,000 100,000

Income