1. Effects of Taxation BBA 8 th Semester Bakhtar University

2. Taxation’s Effect On Economy Classical Economists: The purpose of taxation is to raise govt revenues. To influence the consumption, production and distributional activities of the economy.

3. Taxation’s Effect (Cont…) Therefore, while framing tax policy a government has to see its effect on consumption, production, allocation. Taxes are treated as unwanted guests, therefore, people try to avoid them.

4. Taxation’s Effect on Production and Growth Taxes decrease purchasing power. If not compensated in the form of rise in wages or incomes equal to taxes, the standard of living will come down. Reduce capacity to save and invest. If poor segment taxed, it may deprive them from basic necessities of life.  Ultimate effect on their efficiency.

5. Taxation’s Effect on Production and Growth(Cont..) Higher taxes  decreased savings  decreased investment and capital accumulation  decreased domestic income and employment  decreased savings(next round). The negative effects can be nullified with the help of govt expenditures.

6. Taxation’s Effect on Resource Allocation With taxation policy, govt can divert the scarce resources in the productive uses. For example, if industrial development in certain regions is desired, govt can provide tax holidays or tax rebates, Imposing heavy taxes on luxuries and injurious goods may reduce its use.

7. Taxation’s Effect on Resource Allocation (Cont..) Progressive taxation can narrow the gap between poor and rich segment of the society.

8. Taxation’s Effect on Employment Taxes can reduce the employment opportunities. But if investors are given concessions and facilities, it can increase employment in the country. Second, income collected through taxes can be spent which will increase employment opportunities.

9. Taxation’s Effect on Social Welfare The effect of reducing the present as well as future consumption---welfare of the people may come down. Taxes lead to decrease an individual’s satisfaction. Taxes on industry producing injurious goods or creating environmental pollution may increase welfare.

10. Taxation Theories Benefit Received Theory  This theory states that the people are benefited with the facilities provided by the government. Thus they must pay something back to the govt, in return.  The govt must keep in view the advantages while taxing.

11. This theory reflects exchange relationship between govt and the tax payer.

12. Merits of the Theory The exchange relations require if we get gain from anybody we must also make a payment in its return…..which is tax here. As there is proportionality between tax burden and the use of public goods.

13. When anybody pays tax in accordance with benefits received, he will keep an eye on the quantity of services provided by the govt.Thus,the tax payer keep in his mind the entire picture of the budget.

14. Demerits of Benefits received theory. The benefits which arise due to the provision of public services cannot be properly measured. This theory cannot be associated with the provision of social services.If the govt established old age houses for helpless people who will avail alot of it….but they are not in a position of pay back any thing.

15. The gain accrued from social goods cannot be measured as people use them collectively and we do not have a measure which could be employed to measure the total benefits.

16. Cont.. Capacity-to-pay Theory  While taxing the govt must keep in view the capacity of the people.  As each taxation system is aimed at equity and the taxpayer should contribute to the govt costs to the affordable extent.  They must contribute to national revenue in proportion to the revenue they had earned under govt protection.

17. It means that people should pay taxes to govt in accordance with their capacity so that govt could meet its costs. J.S.Mill and J.B Say were the biggest supporters of this theory.

18. All those Economists have favoured this theory who are concerned about the re distribution of income and wealth. This theory is based on the principle of horizontal equality which is that all those people who have the same capacity should pay the same tax.

19. According the this theory tax payment depends upon the following factors. 1.Income as the criterion of ability to pay tax.

20. 2.Personal wealth as a criterion of ability to pay: Wealth or assets of a person not only lead to increase his income but they also provide him protection against future risk and danger.

21. 3.Personal consumption as the criterion of ability to pay tax: Regarding consumption taxes Hobbes said some 300 years ago “a person should pay tax on that part of his income which he has consumed while that part of income which he has saved and retained for others should not be taxed.

22. Irving Fisher,J.S.Mill were supporters of this theory. The proponents of this theory state that higher standard of living depends upon the consumption expenditure.

23. Cont.. The Sacrifice Theory  Modern version of capacity to pay theory.  Sacrifices and pains of tax payers are considered.  According to this theory, govt should impose tax in such an amount that the sacrifice made by the tax payers must be minimum.

24. This theory is also known as theory of least sacrifice. This is the improved version of ability to pay criterion and is supported by Economist like Pigou. According to this theory, the taxes be imposed in such a way that the total sacrifice faced by the people must be minimum.

25. The Taxation Structure of Underdeveloped Countries(UDCs) Dependence on Consumption Taxes  Indirect taxes of consumption nature.  Sales tax constitute a major share of govt’s tax revenue.  Per capita income of $500: 2/3 of total tax  A survey of 43 developing countries: income tax:27%, import duties and sales tax: 56%, property tax: 5%, export tax: 5% and other taxes: 4% of total revenue.

26. Cont.. Why Consumption taxes are Preferred?  Customary to conceal the income  Tax rate increases sharply with increase in income  Complicated income tax system  Income tax corruption  Heavy expenditures at the time of collection of income tax

27. Cont… Indirect consumption tax reduces the use of luxurious goods thus saves foreign exchange. The custom duties encourage import substitution. For the sake of economic development the custom duty is reduced on the import of machinery and raw material.

28. Cont… Income Tax and Corporate Tax: With income tax governments are in a position to tax those people who come into high income brackets. Meets the principle of equity whereby the burden of tax is more on the rich and less on the poor. Removes unequal income distribution.

29. Cont… People in UDCs neither like to pay the tax, nor govts are serious in extending the base of such tax because of political or economic reasons. Corporate Tax is a tax imposed on the undistributed profits of corporations.  Easy to impose and govt gets enough revenues.

30. Cont… Wealth Tax: Imposed on houses, cars and lands etc. Beneficial because it doesn’t reduce investment Imposed on land lords generating revenue for the government as well as making the persons use these resources efficiently. Very low revenue for the govt.

31. Cont.. Export Duty: imposed on goods exported by the country. Generates very little percentage of revenue for the government Lead to reduce the comparative advantage of these countries. Reduces the incentives among exports