Key Words / Outline

Taxation: An IntroductionTaxation: An Introduction

(Public Finance)(Public Finance)

Course # AIS 2305:Course # AIS 2305:Theory & Practices of TaxationTheory & Practices of Taxation

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Issues to be discussed:Issues to be discussed:

Public Finance and the Type of Economy Public Finance and Tax as a Source of

Public Revenue Other Sources of Public Revenue vs.

Taxation Public Finance vs. Private Finance Importance of Public Finance

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Public Finance and Type of EconomyPublic Finance and Type of Economy

In a country, which goods are to be produced, at what quantity, how to be produced and how the produced goods to be distributed depend on the type of the economy.

Capitalist economy (e.g., the USA): Size of the govt. is minimum and the role is of regulatory nature.

Socialist economy (e.g., Cuba): Role of the govt. is pervasive and the size of the private property is very minimum and the govt. produces and distributes all the goods.

Mixed economy (e.g., Bangladesh): Both the private and the public sectors are of equal importance.

Public finance (i.e., financing by the govt.) is thus dependent on the size and role of the government.

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Public Finance vs. TaxationPublic Finance vs. Taxation

Public Finance is the funding by government. “Public finance, also known as public sector economics, focuses on

the taxing and spending activities of government and their influence on the allocation of resources and distribution of income” –Harvey S. Rosen (1985).

“Public finance deals with the finance of the public as an organized group under the institution of government” – Philip E. Taylor (1970).

Scope of Public Finance: Public revenue (Taxation, Printing currency, Charging for public

goods, and Borrowing)Public expenditures: Revenue and Development exp Financial administration (Preparation of budget, passing and

implementation of budget, government audit, etc.) But in a narrow sense, public finance mainly deals with the public

revenue and tax is one of the sources of public revenues. Tax is referred to as the compulsory, unrequited payments to

general government.

Slide 1-5Other Sources of Public Revenuevs. Taxation

Other Sources of Public Revenuevs. Taxation

‘Public revenue comes from four sources: Taxation, Printing currency, Charging for public goods, and Borrowing.

Printing Currency: Govt. is the only authority that can print currency as a legal tender to finance its activities. But printing currency for additional financing is often called as the debasement of the currency (or ‘inflation tax’), because it will reduce the purchasing power of the currency and create inflation.

Charging for Public Goods: Govt. may charge for the goods and services it provides. This is quite straightforward where the govt. operates like a commercial business. However, where nonrivalry and non-excludability exist, it would be very difficult, or even impossible, or very costly if possible, to charge individuals directly on the basis of the use of many govt. services.

Borrowing: Govt. may raise money by borrowing. Govt. can borrow either from their own citizens or from overseas. However, public debt (interest and principal) has to be serviced and debt financing, therefore, adds to the future budgetary commitments of the government authorities.

Taxation has its limits as well, but they considerably exceed the amounts that can be raised by resorting to other three sources. So while govt. often use all four methods of raising resources, taxation is usually by far the most important source of govt. revenue, because of its characteristics in achieving govt. financial, economic, political and social objectives.

Slide 1-6Other Sources of Public Revenuevs. Taxation

Other Sources of Public Revenuevs. Taxation

A. Tax revenuesB. Nontax revenues:

1. Commercial revenue – received in the form of prices 2. Administrative revenues: i. Fees ii. Licence Fee iii. Special Assessment iv. Fines and Penalties v. Forfeitures vi. Escheat (the claim of a government to the property of a person who dies without having any legal heirs or without keeping a will)

3. Gifts and grants

Other Classification of Public Revenues

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Public Finance vs. Private FinancePublic Finance vs. Private Finance

Similarities: Related to satisfying wants Borrowing and repayment of debts Surrounded by economic activities such

as production, investment and exchanges

Maximization of welfare from the resources used in financing

Creation of financial assets

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Public Finance vs. Private FinancePublic Finance vs. Private Finance

Point of Diff. Public Finance Private Finance

1. Income and expenditure policy

Expenditure planning first, then raising funds

Expenditure planning according to income

2. Sources of revenues

Taxation, printing currency, charging for public goods, and borrowing

Current income, past savings and personal borrowing

3. Compulsory acquisition of resources

Only government has this authority (like tax collection)

Private sector cannot use coercion to acquire income or resources in a civilized society

4. Forms of borrowing

Govt. can take non-repayable loan and can take loan internally or externally

Private sector cannot take non-repayable loan and cannot take loan internally

5. Rate of interest on borrowing

Very low due to very high credit-worthiness and sometimes due to use of coercion

Normally depends on credit-worthiness and collateral and usually high

Dissimilarities:

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Public Finance vs. Private FinancePublic Finance vs. Private FinanceDissimilarities:

Point of Diff. Public Finance Private Finance

6. Creation of currency

Government can print currency to finance, which is a back-borrowing and debasement of currency

Private sector cannot print currency

7. Principle of financing

Budget principle guided by decisions made through political and administrative system and based on general social objectives

Market principle guided by economic rationality and hence profit-oriented and follows quid pro quo

8. Budget planning

Govt. can adopt balanced budget, surplus budget, or deficit budget and usually the budget is annual consistent with long-term planning

Private sector can adopt balanced or surplus budget, but no deficit budget, and the budget may be for any period

9. Environ-mental influence

Govt. expenditures have specific objectives (full employment, economic growth, stabilization etc.) and not influenced by the surrounding environment

Private sector expenditures are influenced by the surrounding environment, standard of living, consumption-habit etc.

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Public Finance vs. Private FinancePublic Finance vs. Private FinanceDissimilarities:

Point of Diff. Public Finance Private Finance

10. Relationship between expenditure and welfare

Govt. expenditures do not follow the law of equi-marginal utility, but govt. tries to maximize the social utility from the govt. expenditures

Private sector expenditures do follow the law of equi-marginal utility

11.Time period of expenditure

May be very long-term due to having perpetual entity by the state and return from some projects may be readily available

Usually short-term and return from investment is expected within a specific period

12. Publicity of income and exp. account

Mandatory disclosure through budget announcement and various statistics on national income accounting

Usually kept confidential

13. Effect of income & exp.

On the whole society and far-reaching On individual family or at best on relatives & friends

14. Provision of insolvency

Provision of insolvency is not applicable Provision of insolvency is applicable

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Importance of Public RevenueImportance of Public Revenue

Public Finance is of high importance due to its following roles: Controlling unfair competition or monopolyProvision of social goods to satisfy ‘merit wants’ (health,

education, etc.)Reducing or prohibiting production or consumption of demerit

goodsRedistributing income and wealthMaintaining price stabilityEnhancing employmentMaintaining socially desirable economic growthReducing negative externalities in case of investments as far

as possibleMaintaining law, order and securityForming capital and investment, etc.

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End of the PresentationEnd of the Presentation

Thank you.