PUBLIC FINANCE
Ali M. A. Mahmoud
4
Objectives of the lecture
Determining the advantages and disadvantages of
direct tax.
Identify the sources of indirect tax revenue.
Determining the advantages and disadvantages of
indirect tax.
Define the concept of non-tax revenue.
Identify sources of non-tax revenue.
Learn about capital receipts, and sources of capital
receipts.
Sources of Public Revenue
Tax Non Tax Capital
Revenue Revenue Receipts
Direct Indirect
Taxes Taxes
(1) T A X R E V E N U E
Tax revenue forms the 1st part of the Public Revenue.
Tax revenue is the result of applying a tax rate according to a tax base.
A tax base is the overall value of assets, income (individual income or
corporate income), and economic activity that is subject to taxation.
Tax Liability = Tax Base x Tax Rate
Total tax revenue as a percentage of GDP indicates the share of the
country's output collected by the government through taxes.
(1) T A X R E V E N U E
There are Three types of Tax
• Aprogressive tax takes a larger percentage of income
from high-income groups than from low-income
groups.
• Aproportional tax takes the same percentage of
income from all income groups.
• Aregressive tax takes a larger percentage of income
from low-income groups than from high-income
groups.
C ont. (1) T A X R E V E N U E
Tax revenue can be regarded as one measure of
the degree to which the government controls the
economy's resources.
Tax revenue is the income that is gained by
governments through taxation
Tax revenue
▪ Direct taxes
▪ Indirect taxes
C ont. (1) T A X R E V E N U E
1. Direct Taxes
The term Direct tax generally means a tax paid directly to the
government by the persons on whom it is imposed.
• Merits of direct tax
(a) Equity
(b) Certainty
(c) Creates Public consciousness (awareness)
(d) Relatively elastic
(e) Anti-inflationary
C ont. (1) T A X R E V E N U E
1. Cont. Direct Taxes
•Cont. Merits of direct tax
(a) Equity
• Providing economic and social justice to the people,
that each person should pay taxes to the government
according to his ability to pay.
• The rich class people should pay higher taxes to the
government, because without the protection of the
government authorities (Police, Defense, etc.) they
could not have earned and enjoyed their income.
C ont. (1) T A X R E V E N U E
1. Cont.Direct Taxes
•Cont. Merits of direct tax
(b) Certainty
• Tax which individuals have to pay should be
certain, not arbitrary.
• That means that tax payer should know in
advance how much tax he has to pay, at what
time he has to pay the tax, and in what form the
tax is to be paid to the government.
C ont. (1) T A X R E V E N U E
1. Cont. Direct Taxes
•Cont. Merits of direct tax
(c) Creates Public consciousness (awareness)
• According to certainty, direct tax creates social awareness among
the general public. Since you have to pay a certain sum of money
to the government, you expect something back as well.
• Moreover, you tend to feel more socially aware and responsible,
as it is your money that is spent all around you.
Direct tax has been proven to be a positive contributing factor
in lesser crimes, littering and damaging public goods.
C ont. (1) T A X R E V E N U E
1. Direct Taxes
Cont.
•Cont. Merits of direct tax
(d) Anti-inflationary
Modern economists considered taxation as a better anti-
inflationary measure as compared to public debt.
C ont. (1) T A X R E V E N U E
1. Cont. Direct Taxes
• Cont. Merits of direct tax
(e) Relatively elastic
Taxes should be elastic in nature. In other words, the revenue from
tax should be capable of increasing or decreasing according to the
requirement of the country. For example, if the government needs
more income at time of crisis, the tax should be capable of collecting
more income through increase in its rate.
C ont. (1) T A X R E V E N U E
1. Direct Taxes
Cont.
• Demerits of direct tax
(a) Tax Evasion
(b) Inconvenient
(c) Narrow Coverage “narrow based”
(d) Affects Capital information
(e) Effects on Willingness and ability to work
C ont. (1) T A X R E V E N U E
1. Direct Taxes
Cont.
•Cont. Demerits of direct tax
(a) Tax Evasion
• Tax evasion is the illegal non-payment or
under-payment of taxes, usually by
deliberately making a false declaration or
no declaration to tax authorities – such as
by declaring less income, profits or gains
than the amounts actually earned, or by
overstating deductions.
C ont. (1) T A X R E V E N U E
1. Direct Taxes
Cont.
•Cont. Demerits of direct tax
(b) Inconvenient
• That Convenience does not apply to direct
taxes such as income tax or wealth taxes.
• They are required to be submitted on time,
and each taxpayer is responsible for
keeping accurate records.
• Additionally, paying these taxes in one
lump sum is very inconvenient.
C ont. (1) T A X R E V E N U E
1. Direct Taxes
Cont.
•Cont. Demerits of direct tax
(c) Narrow Coverage “narrow based”
• Most direct taxes have a narrow base; As
a result, a significant portion of the
population remains unaffected, and as a
result, they fail to achieve their goal of
fostering civic awareness among citizens.
C ont. (1) T A X R E V E N U E
1. Direct Taxes
Cont.
•Cont. Demerits of direct tax
(d) Affects Capital information
Since the assessment of direct taxes depends
upon the voluntary declaration of the tax
payer about has income, wealth, etc., there is
great scope for tax evasion by concealing real
income. Thus, in fact, under direct taxation,
honesty is taxed while dishonesty is
rewarded. Tax evasion in effects leads to
corruption also.
C ont. (1) T A X R E V E N U E
1. Cont. Direct Taxes
• Cont. Demerits of direct tax
(e) Effects on Willingness and ability to work
• Taxes that reduce aggregate savings or raise
aggregate investment tend to raise a country’s net
financing need and hence increase net capital
inflows.
• There are several channels through which taxes
may affect aggregate savings.
• In particular, an increase in income tax rates will
reduce the degree to which present consumption
may be exchanged for future consumption, and
therefore tends to lower private savings.
C ont. (1) T A X R E V E N U E
2. Indirect Taxes
An indirect tax is one in which the burden can
be shifted to others. The tax payers is not the
tax bearer. The impact and incidence of
indirect taxes are on different persons. An
indirect tax is levied on and collected from a
persons who manages on whom the real
burden of tax falls. For e.g. Commodity taxes
or sales tax etc…., are indirect taxes.
C ont. (1) T A X R E V E N U E
2. Indirect Taxes
Cont.
Sources of Indirect taxes
Central Excise Duties
Customs Duties
Service Tax
Other taxes and Duties
Taxes of Union Territories
Value Added Tax (VAT) 20
C ont. (1) T A X R E V E N U E
Cont. 2. Indirect Taxes
Merits of Indirect Taxes
(a) Universality.
(b) Influence on Pattern of production.
(c) Wide coverage.
(d)May not affect Motivation to work
and Save.
(e) Social Welfare. 21
C ont. (1) T A X R E V E N U E
Cont. 2. Indirect Taxes
Demerits of Indirect Taxes
(a) High cost of collection.
(b) Increase income inequalities.
(c) Lack of Social Consciousness.
(d) Affect consumption.
(e) Inflationary. 22
C ont. (1) T A X R E V E N U E
Cont. 2. Indirect Taxes
e.g. Value Added Tax (VAT)
The VAT is a tax levied on
the value added to the
product at all stages.
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C ont. (1) T A X R E V E N U E
Cont.2. Indirect Taxes
Benefits of VAT
Calculation of vat is easy and simple.
It avoids double taxation .
It brings more revenue to government .
It avoids tax evasion .
It brings uniform tax structure through out
the country. 24
(2) Non-TAX R E V E N U E
While taxation is a primary source of income
for the government, it also earns some recurring
(cyclic) income other than tax, which is called
non-tax revenue.
Non-Tax Revenue is the recurring income
earned by the government from sources other
than taxes. 25
(3) C apital Receipts
When revenue Mobilized through tax and
non-tax sources is insufficient to meet its
expenditures, the central government will try
to mobilize income through capital receipts.
26
C ont. (3) C apital Receipts
Sources of capital receipts
➢Internaland external borrowings
➢Small savings
➢Provident funds
➢Loan recovery
➢Public deposits 27
