Taxation | Meaning, Features, Reasons, Principles, Systems & Types

Taxation is the act of imposing a mandatory levy by the government on the income of individuals, businesses, and goods and services. It entails a compulsory payment made by eligible citizens toward the country’s expenditures, irrespective of the specific benefits received. This contribution is imposed by the government on goods, individuals, and corporate entities without […]

Taxation is the act of imposing a mandatory levy by the government on the income of individuals, businesses, and goods and services. It entails a compulsory payment made by eligible citizens toward the country’s expenditures, irrespective of the specific benefits received. This contribution is imposed by the government on goods, individuals, and corporate entities without consideration for the individual benefits received by the taxpayer.

 

Features of Taxation:

  1. Compulsory levy for individuals or corporate bodies.
  2. Levied exclusively by the government or its agencies.
  3. Payment made as a sacrifice.
  4. Intended for the general welfare of the population.
  5. Tax payment may have age limits.

 

Reasons for Government Taxation:

  1. Generate revenue for the government.
  2. Redistribute income to reduce the wealth gap.
  3. Protect infant industries from established competition.
  4. Discourage the importation of harmful goods.
  5. Use as a fiscal tool to control the economy.
  6. Encourage industrialization through incentives like tax rebates.
  7. Support social services such as social insurance and health care.

 

Principles of Taxation (Adam Smith’s Canons):

  1. Principle of Equity: Tax should be proportional to the taxpayer’s ability to pay.
  2. Principle of Certainty: Taxpayers should know the amount, medium, and timing of payment.
  3. Principle of Convenience: Collection methods and timing should suit taxpayers.
  4. Principle of Economy: Collection costs should be minimal relative to the amount collected.
  5. Principle of Flexibility: The tax system should adapt to changing conditions.
  6. Principle of Neutrality: Taxation should not hinder enterprise or productivity.
  7. Principle of Simplicity: The tax system should be easily understandable.
  8. Principle of Impartiality: No discrimination in tax collection.
  9. Difficult to Evade: Minimize tax evasion and avoidance.

 

Systems of Taxation/Forms of Income Tax:

  1. Proportional Tax: Same tax rate applied to all taxpayers.
  2. Progressive Tax: Tax rate increases with income.
  3. Regressive Tax: Tax rate decreases as income increases.

 

Types of Taxation:

(A) Direct Tax: Imposed directly on individuals’ or organizations’ income.

    1. Advantages: Progressive, easy to ascertain, easy to calculate.
    2. Disadvantages: Discourages savings and investments, difficult to assess.

 

(B) Indirect Tax: Levied on goods and services, initially paid by manufacturers or importers.

  1. Advantages: Collection is less difficult, yields more revenue.
  2. Disadvantages: Causes inflation, unreliable revenue source, regressive.

 

Economic Effects of Taxes:

  1. Direct taxes lead to reduced disposable income and consumption.
  2. Indirect taxes may lead to inflation, smuggling, reduced production, and changes in consumption patterns.

 

Tax Collection Problems in Nigeria:

  1. Corruption and indifference of revenue officers.
  2. Tax evasion and avoidance.
  3. Lack of proper accounting records.
  4. Ignorance, illiteracy, and mass poverty.
  5. Apathy of taxpayers due to corruption.
  6. Government’s inability to provide essential infrastructure.

 

Tax Evasion and Tax Avoidance:

  1. Tax Evasion: Illegal attempt to avoid or pay less tax.
  2. Tax Avoidance: Legal efforts to reduce tax payments.

 

Concept of Tax Base and Tax Rate:

  1. Tax Base: Object or item taxed (e.g., salary, income).
  2. Tax Rate: Percentage applied to the tax base to calculate payable tax.

 

Incidence of Taxation:

  1. Incidence of Tax: Where the tax burden finally rests.
  2. Tax Burden: Financial pain of parting with income as tax.

 

Incidence of Taxation and Elasticity of Demand:

  1. Depends on the elasticity of demand for taxed commodities.
  2. Perfectly inelastic demand shifts entire tax burden to consumers.
  3. Perfectly elastic demand shifts burden to producers.
  4. Unitary elasticity results in shared burden.
  5. Moderately elastic or inelastic demand leads to a shared burden between producers and consumers.

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