The collection of taxes and fees is the most fundamental method for governments to generate public revenue that allows them to finance investment in infrastructure, human capital and the supply of services to the public and businesses.
Taxes play a crucial contribution to making growth sustainable and fair. Many countries struggle to generate enough revenues to fund their development.
Making tax payments easier enhances the level of competition. Complex tax systems can be connected with the high rate of tax evasion and large informal industries, increased corruption and lower investment. Modern tax systems should maximise tax collection while reducing the burden on taxpayers to adhere to tax laws.
The tax systems must be equitable and fair. Governments must strike a balance between achieving goals like improved revenue mobilisation, sustainable growth, and lower compliance costs to ensure that the tax system is equitable and fair. The relative taxation of the poor and the rich, corporate and individual taxpayers, cities and rural areas, formal and informal sectors, labour and investment income, and the older and younger generations are all fair considerations.
Origins of Income Tax
In the late nineteenth century, the income tax began to gain popularity in the developed world. Its primary purpose is to raise revenue for government expenses, but it has also become widely regarded as an extractive form of taxation. It requires a sophisticated tax bureaucracy to assess private income and monitor compliance. It also involved the public scrutiny of private income.
While the income tax is a relatively modern innovation, the history of taxation dates back to the ancient Romans. In the late 1st century BCE, the Roman emperor Augustus changed the tax system. Before Augustus, taxes were collected through tax farmers, who assessed whole regions and then turned over the money to the government. During the reign of Augustus, however, the government moved to a direct taxation system similar to an income tax. In the beginning, taxes were based on wealth, social position, and ownership of means of production. While taxation practices like tithing were standard, they did not have the precision of the income tax.
Taxes and Government Revenue
In the context of revenue generation, the government is responsible for ensuring that businesses remain viable, which is why tax administration is essential. However, a heavy-handed approach to tax enforcement may negatively affect taxpayer compliance. A positive correlation was observed between taxpayer enlightenment and tax revenue generation, indicative of improved revenue generation when tax administration reforms are implemented.
Tax administration is the body responsible for enforcing tax laws, regulating tax collection, and remittance of taxes. Effective tax administration helps governments restore revenues more quickly. A proactive approach to taxpayer compliance can make revenue generation more sustainable.
Government revenue is collected through a variety of means. For example, the state and local governments collect sales tax as a percentage of the purchase price of consumer goods. Some states, like Minnesota, do not levy sales tax on clothing. Most states also collect personal income and corporate income taxes. Property taxes are collected by municipal governments and are based on the value of the real estate.
Another way to generate revenue for the government is to collect interest on loans. In addition to loans, governments collect interest from loans to private companies and the public. Governments also receive fees from power supply companies like the Central Electricity Authority of India. These fees pay for the cost of providing recurring services. Some of these fees are a form of tax or compulsory contribution, and some fees are based on licences.
Impact of Compliance Risk Management Principles
Revenue management agencies have historically responded reactively to new technologies. Some agencies are reluctant to implement new solutions because they worry about the political risks associated with a failed government initiative. However, new technologies also provide opportunities to improve services and compliance functions. For example, automated systems can match taxpayer reports with third-party data and perform selective checks based on risk analysis.
High-performing tax administrations can use best practices to improve their processes. They can track outcome metrics as well as input metrics. Outcome metrics are important because they reflect the result of an activity. Moreover, high-performing tax administrations use a variety of KPIs to monitor performance and determine trade-offs.
Do Tax Administration Reforms Improve Tax Revenue Generation?
The answer depends on several factors, including how tax administration works, the efficiency of tax collectors, the transparency of tax collection methods, the honesty of taxpayers, and the penalties associated with tax defaults. Measuring the effects of tax administration reforms is difficult, but some studies have shown that they can be an essential tool for boosting tax revenue generation.
One measure is using a simpler tax system to foster greater voluntary compliance and reduce the complexity of structures and procedures. It also facilitates compliance, especially in weak states. For example, after the civil war in Liberia, a tax administration introduced taxes on import values and turnover. It also introduced customs tariffs.
The Effect of Corruption and Governance on Taxes
Corruption and governance are significant factors that reduce tax revenue generation in developing countries. Poor governance and corruption are both detrimental to economic growth and development. While tax revenue is an important source of revenue for the government, poor governance and corruption negatively impact tax revenue generation.
The primary goal for any country’s tax administration is raising funds to finance the government’s expenditures. With steady tax revenues, governments can provide an array of public services and goods, such as maintaining security, building infrastructure for social services, and delivering welfare services.
Additionally, taxes are typically employed by governments to distribute income to those earning less. A progressive tax system which imposes higher marginal and average rates on higher incomes is commonly used to accomplish this.
Good governance practices positively impact tax revenue generation, enhance economic activity, and improve tax collection. Further, the effect of good governance on tax revenue generation is consistent both in the short and long run.