Tax revenue

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Tax revenue is the income that is collected by governments through taxation. Taxation is the primary source of government revenue. Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural resources and/or foreign aid. An inefficient collection of taxes is greater in countries characterized by poverty, a large agricultural sector and large amounts of foreign aid. [1]

Contents

Just as there are different types of tax, the form in which tax revenue is collected also differs; furthermore, the agency that collects the tax may not be part of central government, but may be a third party licensed to collect tax which they themselves will use. For example, in the UK, the Driver and Vehicle Licensing Agency (DVLA) collects vehicle excise duty, which is then passed onto HM Treasury. [2]

Tax revenues on purchases come in two forms: "tax" itself is a percentage of the price added to the purchase (such as sales tax in U.S. states, or VAT in the UK), while "duties" are a fixed amount added to the purchase price (e.g., for cigarettes). [3] In order to calculate the total tax raised from these sales, we must work out the effective tax rate multiplied by the quantity supplied.

Taxation and state capacity

Taxation was a key task in any country as it advances state capacity and accountability. [1] Charles Tilly identifies taxation as a form of extraction that allows the state to execute its primary functions: public policies (education, infrastructures, health care), state making, and protection. [4] Taxation became indispensable in western Europe, when countries needed to fund wars in order to survive. This European model was later exported all around the world. [5] Today, the level of taxation is used as an indicator of state capacity. [6] Developed countries raise more taxes and therefore are able to provide better services. At the same time, the high taxation forces them to become accountable with their citizens, which strengthens the democracy. [1]

Changes in taxation level

The effect of a change in taxation level on total tax revenue depends on the good being investigated, and in particular on its price elasticity of demand. [7] Where goods have a low elasticity of demand (they are price inelastic), an increase in tax or duty will lead to a small decrease in demand—not enough to offset the higher tax raised from each unit. Overall tax revenue will therefore rise. Conversely, for price-elastic goods, an increase in tax rate or duty would lead to a fall in tax revenue.

Laffer curve

The Laffer curve theorises that, even for price-inelastic goods (such as addictive necessary items), there will be a tax revenue maximising point, beyond which total tax revenue will fall as taxes increase. [8] This may be due to:

The Laffer curve, however, is not universally accepted; Paul Krugman referred to it as "junk economics". [9]

Revenue administration

Public sector

A limiting factor in determining the government budget is the capacity to tax. Per capita income (PCI) is the most often used measure of relative fiscal capacity. [10] But this measure fails to base tax capacity computation on other important tax bases like the sales and property tax and corporate income taxes. A representative tax system should assess the level of personal income, the value of retail sales and the value of property to compute fiscal capacity. To do so the average tax rate for each base is computed by dividing the total revenue derived by the total value of the base. Thus, as an example, income taxes collected would be divided by total income to yield a rate of taxation.

Personal Income Tax     Sales Tax       Property Tax    Corporate Tax     total revenue      total revenue     total revenue   total revenue

The averages of each tax base can be used in comparison to other states or communities, that is, the average of other states or communities, to determine whether or not a government compares favorably regionally or nationally. A state or community's standing on these various bases may affect its ability to attract new industry. The resulting rates, high or low in comparison, can become targets for change. The mission of revenue administration is to provide prudent and innovative revenue, investment and risk management and to regulate the use of government capital. [11]

There are four core responsibilities for the revenue administrator:

New real estate development may not only enhance the economic base of a state or community, and it may also expand the tax base. It is not always the case, however, that new developments, especially if not properly planned, can in the aggregate, have a negative impact on the tax base. Economic development traditionally focuses on such things as job generation, the provision of affordable housing, and the creation of retail centers. Tax base expansion focuses primarily on maintaining and enhancing real estate values within the municipality. Municipalities tend to pursue economic development with religious fervor and often do not think strategically about the overall real estate impacts of their economic development initiatives. Yet the existing tax base in almost every municipality throughout the United States is an important source of revenue for funding municipal and school expenditures.

For public sector officials it is important to recognize the potential for a conflict between these two distinct, yet overlapping areas of public policy, and to establish procedures to achieve the proper balance in this regard. [12] For real estate investors it is important to recognize when public policy is not fully cognizant of the impact of its actions on the real estate market, because of the potential negative impact on property values.

In summary, the concept of tax base management is really one of asset management and is particularly important in U.S. states where municipalities derive much of their revenue from their real estate assessments. City officials in Concord, New Hampshire found that a five percent overall increase in the assessed value of existing property would have the same impact on the tax rate as the addition of 2,000,000 square feet (190,000 m2) of new industrial property or 1,000,000 square feet (93,000 m2) of new office/R&D development, both of which are likely to take fifteen or more years to realize.

In addition to being responsible for managing the tax base, a community should also be responsible for helping to ensure economic prosperity for its citizens. These two goals can conflict unless a long-term view is taken regarding public policy actions, and unless the impact of alternate development actions and programs and priorities are not carefully evaluated. Good tax base management may lead to even better economic development, because investors and businesses will want to be in a community. Instead of offering incentives to attract business, they may be willing to pay to come to a community because it's a good place to live, work, shop and play.

See also

Related Research Articles

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A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures, and tax compliance refers to policy actions and individual behaviour aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax reliefs. The first known taxation took place in Ancient Egypt around 3000–2800 BC. A failure to pay in a timely manner (non-compliance), along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.

Taxation in the United States

The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2020, taxes collected by federal, state, and local governments amounted to 25.5% of GDP, below the OECD average of 33.5% of GDP. The United States had the seventh-lowest tax revenue-to-GDP ratio among OECD countries in 2020, with a higher ratio than Mexico, Colombia, Chile, Ireland, Costa Rica, and Turkey.

A land value tax (LVT) is a levy on the value of land without regard to buildings, personal property and other improvements. It is also known as a location value tax, a site valuation tax, split rate tax, or a site-value rating.

1978 California Proposition 13 Ballot initiative which capped property tax at 1% and yearly increases at 2%

Proposition 13 is an amendment of the Constitution of California enacted during 1978, by means of the initiative process. The initiative was approved by California voters on June 6, 1978. It was upheld as constitutional by the United States Supreme Court in the case of Nordlinger v. Hahn, 505 U.S. 1 (1992). Proposition 13 is embodied in Article XIII A of the Constitution of the State of California.

A property tax or millage rate is an ad valorem tax on the value of a property.

FairTax was a single rate tax proposal in 2005, 2008 and 2009 in the United States that includes complete dismantling of the Internal Revenue Service. The proposal would eliminate all federal income taxes, payroll taxes, gift taxes, and estate taxes, replacing them with a single consumption tax on retail sales.

Taxation in the United Kingdom Overview of taxation in the United Kingdom

Taxation in the United Kingdom may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.

Goods and services tax (Australia) Type of value added tax used in Australia

Goods and Services Tax (GST) in Australia is a value added tax of 10% on most goods and services sales, with some exemptions and concessions. GST is levied on most transactions in the production process, but is in many cases refunded to all parties in the chain of production other than the final consumer.

An ad valorem tax is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT). An ad valorem tax may also be imposed annually, as in the case of a real or personal property tax, or in connection with another significant event. In some countries, a stamp duty is imposed as an ad valorem tax.

Although the actual definitions vary between jurisdictions, in general, a direct tax or income tax is a tax imposed upon a person or property as distinct from a tax imposed upon a transaction, which is described as an indirect tax. There is a distinction between direct and indirect tax depending on whether the tax payer is the actual taxpayer or if the amount of tax is supported by a third party, usually a client. The term may be used in economic and political analyses, but does not itself have any legal implications. However, in the United States, the term has special constitutional significance because of a provision in the U.S. Constitution that any direct taxes imposed by the national government be apportioned among the states on the basis of population. In the European Union direct taxation remains the sole responsibility of member states.

Indirect tax Type of tax

An indirect tax is a tax that is levied upon goods and services before they reach the customer who ultimately pays the indirect tax as a part of market price of the good or service purchased. Alternatively, if the entity who pays taxes to the tax collecting authority does not suffer a corresponding reduction in income, i.e., impact and tax incidence are not on the same entity meaning that tax can be shifted or passed on, then the tax is indirect.

Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. The social welfare function used is typically a function of individuals' utilities, most commonly some form of utilitarian function, so the tax system is chosen to maximise the aggregate of individual utilities. Tax revenue is required to fund the provision of public goods and other government services, as well as for redistribution from rich to poor individuals. However, most taxes distort individual behavior, because the activity that is taxed becomes relatively less desirable; for instance, taxes on labour income reduce the incentive to work. The optimization problem involves minimizing the distortions caused by taxation, while achieving desired levels of redistribution and revenue. Some taxes are thought to be less distorting, such as lump-sum taxes and Pigouvian taxes, where the market consumption of a good is inefficient, and a tax brings consumption closer to the efficient level.

The Fair Tax Act is a bill in the United States Congress for changing tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes, payroll taxes, corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to households of citizens and legal resident aliens as an advance rebate of tax on purchases up to the poverty level.

Taxes provide the most important revenue source for the Government of the People's Republic of China. Tax is a key component of macro-economic policy, and greatly affects China's economic and social development. With the changes made since the 1994 tax reform, China has sought to set up a streamlined tax system geared to a socialist market economy.

Laffer curve Representation of the relationship between taxation and government revenue

In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of the government's tax revenue. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and that there is a tax rate between 0% and 100% that maximizes government tax revenue. The shape of the curve is a function of taxable income elasticity —i.e., taxable income changes in response to changes in the rate of taxation.

In Austria, taxes are levied by the state and the tax revenue in Austria was 42.7% of GDP in 2016 according to the World Bank The most important revenue source for the government is the income tax, corporate tax, social security contributions, value added tax and tax on goods and services. Another important taxes are municipal tax, real-estate tax, vehicle insurance tax, property tax, tobacco tax. There exists no property tax. The gift tax and inheritance tax were cancelled in 2008. Furthermore, self-employed persons can use a tax allowance of €3,900 per year. The tax period is set for a calendar year. However, there is a possibility of having an exception but a permission of the tax authority must be received. The Financial Secrecy Index ranks Austria as the 35th safest tax haven in the world.

Property tax in the United States

Most local governments in the United States impose a property tax, also known as a millage rate, as a principal source of revenue. This tax may be imposed on real estate or personal property. The tax is nearly always computed as the fair market value of the property times an assessment ratio times a tax rate, and is generally an obligation of the owner of the property. Values are determined by local officials, and may be disputed by property owners. For the taxing authority, one advantage of the property tax over the sales tax or income tax is that the revenue always equals the tax levy, unlike the other taxes. The property tax typically produces the required revenue for municipalities' tax levies. A disadvantage to the taxpayer is that the tax liability is fixed, while the taxpayer's income is not.

Taxes in Germany are levied by the federal government, the states (Länder) as well as the municipalities (Städte/Gemeinden). Many direct and indirect taxes exist in Germany; income tax and VAT are the most significant.

Taxation in New Mexico comprises the taxation programs of the U.S state of New Mexico. All taxes are administered on state- and city-levels by the New Mexico Taxation and Revenue Department, a state agency. The principal taxes levied include state income tax, a state gross receipts tax, gross receipts taxes in local jurisdictions, state and local property taxes, and several taxes related to production and processing of oil, gas, and other natural resources.

Taxes has an important part in the Moroccan economy. The taxes are levied by the government and the organization responsible for tax policy on Morocco is called the “General Management of Taxes”.

References

  1. 1 2 3 Brautigam, Deborah (2002). "Building Leviathan: Revenue, State Capacity, and Governance" (PDF). Institute of Development Studies. 33.
  2. ↑ Sion Barry, "DVLA sets pace for public sector", Wales Online, Retrieved 21 November 2013
  3. ↑ "Taxes, Duties, Imposts and Excises", Duke University, Retrieved 21 November 2013
  4. ↑ Tilly, Charles (1985). "War making and stata making as organized crime". Bringing the State Back in. Cambridge University Press: 169–191. doi:10.1017/CBO9780511628283.008. hdl:2027.42/51028. ISBN   9780521307864.
  5. ↑ Herbst, Jeffrey (1990). "War and the State in Africa". International Security. 14 (4): 117–139. doi:10.2307/2538753. JSTOR   2538753. S2CID   153804691.
  6. ↑ Moss, Todd; et al. (2006). "An aid-institutions paradox? A review essay on aid dependency and state building in sub-Saharan Africa". Center for Global Development.
  7. ↑ N. Gregory Mankiw, Matthew Weinzierl, and Danny Yagan, "Optimal Taxation in Theory and Practice", Retrieved 21 Nov 2013
  8. ↑ Laffer Curve once again has been proven valid, The Evening Independent - April 5, 1983
  9. ↑ Krugman, Paul (May 25, 2012). "More Laffering". The New York Times.
  10. ↑ "Per Capita Income as a Measure of Well-Being or Standard of Living", Retrieved November 21, 2013
  11. ↑ "Internal Revenue Service Mission Statement", Retrieved November 21, 2013
  12. ↑ "Financial Planning and Management in Public Organizations", Retrieved November 21, 2013
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