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Chapter 11 summary
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Summary of 15 pages for the course EKN 310 at UP (Chapter 11 summary)
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Chapter 11Introduction to taxation and tax equity
Introduction:
Taxes → part of a constitutionally sanctioned system → allows governments to legally
take citizens’ income and assets.
Government can only spend what it takes in from taxes → government spends funds on
grants, education, health, infrastructure, public debt, salaries, SOEs, etc.
Tax and transfer system → powerful force doing good (development, social upliftment,
growth, progress)
- Or it is a destructive force → impoverish and destabilize a country.
Sources of finance:
- User/benefit charges → prices charged for the delivery of certain public goods
and services.
o Charges play role of distribution of resources → distribution of resources is
related to role of prices in the market.
o Set in the political market.
o Can only be levied if exclusion is possible → possible to exclude those who
do not pay for the consumption of the good/service in question.
o Examples → toll roads, public swimming pools, ambulance services,
university education etc.
- Administrative fees → the service or benefit received in return for the fee is
defined broadly and imprecisely.
o Examples → business license, TV license, diamond export rights, fishing
license, motor vehicle license, parking ticket, speeding fine etc.
o Not a significant source of income for the government.
- Borrowing → generally used to fund capital expenditure.
o Governments can borrow from their citizens or from abroad.
o Borrowings must eventually be repaid → therefore amount to deferred
taxes.
- Government induced inflation → government finances expenditure in a way that
increases the money supply = inflationary
o This reduces the real value of government debt that it repays → “inflation
tax”.
▪ Value of debt declines as inflation rises.
▪ Government repays cheaper debt.
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, Definition and classification of taxes:
Taxes → transfers of resources from persons or economic units to government.
- They are compulsory and are legally enforceable.
- Not necessarily a link between resources that a particular taxpayer transfers to
government, and the goods and services that taxpayer receives in return →
otherwise it would be a user charge.
o Gives rise to free rider problem → consequence from this delinking of tax
payments and goods received.
▪ Taxpayers avoiding or evading taxes because they share in the
public goods despite not paying → taxes are often not paid
voluntarily and must be enforced.
Governments → do not have unlimited powers to tax or to confiscate income and assets
of citizens.
- Must levy taxes in accordance with SA’s Constitution of 1996 and money bills or
laws that must be passed by the National Assembly.
o Gives government the legal right to appropriate amounts of money and
impose taxes, levies, duties etc.
o Taxation is subject to oversight by Parliament.
In a democracy → Parliament should prioritize the interests of all citizens → take note of
the preferences of their voters as well as those of other parties.
Classification of SA taxes:
- Taxes on income, profits (60% of tax revenue in 2018/19)
o Most important tax.
o 66.2% contributed by individuals and 29.1% contributed by companies.
- Taxes on payroll and workforce (1.4% of tax revenue in 2018/9)
- Taxes on property (1.3% in 2018/9)
- Domestic taxes on goods & services (36.7% in 2018/9)
- Taxes on international trade & transactions (4.5% in 2018/9)
- Stamp duties and fees (negligible)
NOTE! Domestic tax on goods and services (VAT) → 36.7% → makes up the second
biggest class of taxes.
- Tax base and rates of return:
o Tax bases → what will be taxed.
▪ Income
▪ Wealth
▪ Consumption (sales or transactions)
▪ People → poll tax (lump-sum tax per head)
o Flows → associated with a time dimension → measured across a period of
time → can be taxed → income over a period of time (e.g the tax year).
o Stocks → have no time dimension → measured at a particular point in time
→ can be taxed → wealth at a specific time.
o Tax base decided on (once it is decided what will be taxed) = tax structure
can be set
▪ Tax structure is comprised of tax base and tax rate.
• Tax rate → amount of tax levied per unit of the tax base.
NOTE! Tax may be progressive, proportional, or regressive, depending on what happens
to the average tax rate as the tax base grows.
Notes can only be purchased through the following details:
gorgataylor@gmail.com or 0829369077 2
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