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On taxes
By
D.D. Phiri - 24-06-2002 |
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Someone has been quoted by the press as saying that some members of parliament do not follow the intricacies of the budget and simply put their trust in the expertise of the officials.
This is not very strange. A Finance Bill, even in older parliaments, is understood by only few legislators. However, if we are acquainted with some principles of taxation, we should be able to gauge whether the taxes prescribed for the next financial year will impose hardships on us or not. Hence this essay is on the elements of taxation.
When agent provocateurs asked Jesus to whom they were going to pay taxes, he in turn asked them if they had a coin in their pockets. They produced one on which was embossed Caesar’s image. Then Jesus uttered the memorable words ‘Give to Caesar what belongs to Caesar, and to God what belongs to God.”
While giving to God is for most people a voluntary matter, giving to Caesar (the state) is not quite voluntary. A tax is a compulsory payment to a central and local government.
Primarily, the aim of taxation is to raise money to pay for government bills. In the days of old, before the advent of the money economy, rulers used to summon up their subjects to render direct services. They would contribute their harvests to the chiefs granary, cultivate his garden (the genuine thangata), build roads and bridges. The chief, in turn, distributed food to the needy and fed soldiers from the common store.
Even today ultimately taxation transfers citizens’ economic resources to the state. Once the government has raised the revenue, it spends it on salaries for its staff, on the acquisition of weapons, buying or erecting office buildings and so on. Ultimately, a modern state lays its hands on the services and goods of the community which are then utilised for the common good.
Taxes are not very popular. During the time of Jesus, tax collectors known as publicans were classified as sinners by the Jewish clergy. The Roman tax system was oppressive. People will acquiesce in a tax system if it operates with fairness and due regard to the convenience of the tax payers. Over a period of more than 200 years, economists have discussed the canons or principles of taxation.
Uppermost is the principle of benefit. This states that different people should be taxed different taxes in proportion to the benefit they receive from public activity. This principle is not tenable in a welfare-oriented state for in such a state, the poor tend to receive more benefits from state budgetary expenditure than they contribute to its revenue.
The second most important principle is the ability to pay. The amount of taxes people pay should relate to their income, wealth or ability to pay. Those who earn more should pay more.
The ability to pay has undergone refinements. A tax is called proportional, progressive or repressive depending upon whether it takes from high income people the same fraction of income, a large fraction of income or a smaller fraction than it takes from low-income people.
Taking the same fraction from high income as from low income hurts the poorer than the richer. If you tax 50 percent a man who earns K1,000 a week, he is deprived of K500 and may not afford to buy a 50 kg bag of maize that cost K850. But if you tax 50 percent someone who earns K2,000, he still has K1,000 and can afford the bag of maize. Therefore, the less paid person should be taxed a smaller fraction so that enough of his income be left on which he can survive.
Both to do justice to the less paid and to extract more from the better paid the modern principle adopted is progressive taxation which means in this case moving step by step or cumulative. The higher income you earn, the higher the percentage rate you are charged.
There is an unsettled debate on the effect of progressive taxation. By paying at a higher rate the higher you earn it seems as if your extra efforts simply benefit the state and the person on whose behalf the state will spend your taxed earnings. In this case, is there any point working even harder. Would it not be better to take time off and enjoy leisure instead of exerting yourself further just to earn money for the public purse?
It is said that some people work even harder under progressive taxation because they want to maintain the standards they have already attained.
In contrast to progressive taxation is regressive taxation which takes from rich people a smaller fraction of income than it takes from low-income people. This was the case with the poll tax when it was paid both by labourers and head clerks or headmasters. As the clerk’s or headmaster’s salary increased, the proportion of the poll tax he paid declined.
The third and fourth principles of taxation are horizontal equity and vertical equity. The former states that those who are essentially equal should be taxed equally, while the latter states that unequals should be taxed unequally.
A legislator when scrutinising the tax structure should try to find out if the proposed tax will act as a disincentive on salary earners or on investments.
A tax should be collected at a convenient time for the tax payer. Pay-as-you-earn is a more convenient method than billing the tax payer once at the end of the year. Usually by the end of the year, he has spent most of his earnings. The best time for collecting poll taxes when they existed was during the harvesting or marketing season when rural dwellers were selling their produce.
Taxes are generally classified into direct and indirect taxes. In making this classification a term that is often in use is incidence or burden of taxation. Direct taxes are levied directly on people. They include personal income taxes and corporation income taxes. If out of your K60,000 salary per annum you have been taxed K5,000, your net income that year is K55,000. You have suffered a loss of K5,000 and you are unable to pass on the burden to someone else.
An indirect tax is levied on sales of goods or services. These taxes include customs duties on imported goods and excise duties on locally produced goods. If you have imported cement worth K60,000 and are taxed K5,000, your total expenditure shifts to K65,000 but if you sell that cement for K70,000 not only do you recover the customs duty you paid, you also make a profit. You have shifted the burden of K5,000 customs duty on to the customer who buys your cement.
Indirect taxes cause less resentment than direct taxes because there is shifting of the burdens. The importer shifts the burden to the wholesaler, the wholesaler to the retailer, and the retailer to the buyer or consumer.
Indirect taxes are regressive in that the poorer person pays proportionately more than the richer person. Surtaxes and customs duties are levied on cigarettes and beers which are consumed by both the rich and poor. But consumption of these goods or “bads,” is usually optional. Governments generally avoid imposing indirect taxes on necessities like food and drugs. |
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