Course No.

4135:

Taxation

Taxation: An Introduction
(Public Finance)

Key Words / Outline

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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 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. 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.

Other Sources of Public Revenue vs. Taxation

Public revenue comes from four sources:

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Taxation, Charging for public goods, and

Printing currency, 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.

Other Sources of Public Revenue vs. Taxation

Other Classification of Public Revenues
A. B.

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Tax revenues 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

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Public 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

Public Finance vs. Private Finance

Dissimilarities:
Point of Diff. 1. Income and expenditure policy 2. Sources of revenues 3. Compulsory acquisition of resources 4. Forms of borrowing 5. Rate of interest on borrowing Public Finance Private Finance

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Expenditure planning first, then Expenditure planning according to raising funds income Taxation, printing currency, charging for public goods, and borrowing Only government has this authority (like tax collection) Current income, past savings and personal borrowing Private sector cannot use coercion to acquire income or resources in a civilized society

Govt. can take non-repayable Private sector cannot take nonloan and can take loan internally repayable loan and cannot take loan or externally internally Very low due to very high credit- Normally depends on creditworthiness and sometimes due to worthiness and collateral and usually use of coercion high

Public Finance vs. Private Finance

Dissimilarities:
Point of Diff. 6. Creation of currency 7. Principle of financing Public Finance Government can print currency to finance, which is a back-borrowing and debasement of currency Budget principle guided by decisions made through political and administrative system and based on general social objectives Govt. can adopt balanced budget, surplus budget, or deficit budget and usually the budget is annual consistent with long-term planning Private Finance

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Private sector cannot print currency

Market principle guided by economic rationality and hence profit-oriented and follows quid pro quo Private sector can adopt balanced or surplus budget, but no deficit budget, and the budget may be for any period

8. Budget planning

9. Environ-mental Govt. expenditures have specific Private sector expenditures are influence objectives (full employment, economic influenced by the surrounding growth, stabilization etc.) and not environment, standard of living, influenced by the surrounding consumption-habit etc. environment

Public Finance vs. Private Finance

Dissimilarities:
Point of Diff. 10. Relationship between expenditure and welfare 11.Time period of expenditure Public Finance

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Private Finance

Govt. expenditures do not follow the law of Private sector expenditures do equi-marginal utility, but govt. tries to follow the law of equimaximize the social utility from the govt. marginal utility expenditures May be very long-term due to having Usually short-term and return perpetual entity by the state and return fromfrom investment is expected some projects may be readily available within a specific period Usually kept confidential

12. Publicity of Mandatory disclosure through budget income and exp. announcement and various statistics on account national income accounting 13. Effect of income On the whole society and far-reaching & exp. 14. Provision of insolvency Provision of insolvency is not applicable

On individual family or at best on relatives & friends Provision of insolvency is applicable

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Importance of Public Revenue

Public Finance is of high importance due to its following roles:
Controlling unfair competition or monopoly Provision of social goods to satisfy merit wants (health, education, etc.) Reducing or prohibiting production or consumption of demerit goods Redistributing income and wealth Maintaining price stability Enhancing employment Maintaining socially desirable economic growth Reducing negative externalities in case of investments as far as possible Maintaining law, order and security Forming capital and investment, etc.

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End of the Presentation

Thank you.