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Summary Chapter 11 - Introduction to taxation and tax equity
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Chapter 11 - Introduction to taxation and tax equity
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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.
10.1 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.
DO NOT DISTRIBUTE – PROPERTY OF GB
, 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.
11.2 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.
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, 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.
11.2.1 Tax base and rates of taxation
Tax bases → what will be taxed.
o Income
o Wealth
o Consumption (sales or transactions)
o People → poll tax (lump-sum tax per head)
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).
Stocks → have no time dimension → measured at a particular point in time →
can be taxed → wealth at a specific time.
Tax base decided on (once it is decided what will be taxed) = tax structure
can be set
o Tax structure is comprised of tax base and tax rate.
o 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.
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