Taxation is an important instrument the government employs to facilitate economic growth and development. It is the act of assessing taxes such as tax imposition and tax collection.
Table of Contents
What is a Tax?
A tax is a compulsory contribution sum which the government or its agency levies on individuals and organizations or on properties. This is with the aim of providing social welfare and other government expenditures. These taxes can either be local, state, or federal.
The revenue governments generate from taxes helps to finance their activities such as providing public goods, social welfare, social security, healthcare facilities, economic needs, etc. Taxes can be direct or indirect.
According to Economics, taxes fall on the person that carries the final tax burden whether it is the firm/business or the final consumers of the goods and services of the firm.
From the accounting perspective, there are other considerations of taxes such as payroll taxes, federal and state income taxes, and sales taxes.
There are two basic elements of tax, the tax base, and the tax rate. The tax base is the property or object on which the government levied the tax while the tax rate is the percentage of the tax levied such as 5%, of income or 5% of the value of goods.
When the taxpayer understands the factors that trigger a tax situation, he will be able to manage his finances in order to reduce the impact of taxes. Tax is the percentage of the taxpayer’s earnings that he should remit to the government. This means that the deliberate failure to meet up to the tax liabilities is punishable by law.
The government levies taxes on salary income, capital gains from investment appreciation, dividends, sales, or interest received (as additional income), and other taxable assets. Governments use an agency to collect taxes and these agencies are usually the internal revenue service (IRS).
What is taxation?
Taxation is the aggregate assessment of taxes. It involves the imposition of taxes, collection of taxes, keeping accounting records, and auditing those tax records. The purpose of taxation is to generate revenue for the government to enable government expenditures, the provision of social and economic benefits to members of the public, for the purpose of economic control.
Taxation, in essence, is the act of imposing a financial obligation on citizens or residents by the government. This comes up when the government and other authorities require citizens and corporations to pay a fee to them. It applies to every type of levies that are not voluntary from all forms of income. The term usually refers to an act though it can come in the form of a noun or a verb. The payment of taxes to the government has been in existence right from ancient times down to the ongoing civilization.
Taxation is different from other forms of payment like market exchanges or trade. This is because taxation does not require anybody’s consent and it is not directly dependent on any rendering of services. The government uses both implicit and explicit threats of force to compel taxation. It is legally different from extortion or a fraudulent scheme because the institution imposing it is the government authority, and not private individuals or sectors.
Classification of tax
Here, taxes are classified based on who pays them and who bears the final burden, the extent to which the burden can be shifted, etc.
A) Direct taxes
These are the taxes the government levies on the income of individuals and firms, and their properties. This income includes interest, rent, profits, wages, and salaries. The final burden falls directly on the person paying the tax. We can also refer to direct taxes as taxes levied primarily on natural persons and it is usually based on the taxpayer’s ability to pay as income, consumption, and net wealth measures it.
The types of direct taxes include personal income tax, company tax, payroll tax, property tax, etc.
Income tax
These are the taxes the government imposes on financial income that firms generate within their jurisdiction, both individuals and firms. This is a percentage of income that the income-earner remits to the federal or state government. According to law, it is compulsory for taxpayers to file an income tax return annually to determine their tax obligations.
Personal income tax is the tax that governments levy on an individual income and it is usually progressive in nature. It can help the government to fund government programs and services such as social welfare and security. This is usually the case of taxation in India.
State income tax
As seen above, income tax is a form of direct tax the government imposes on financial income that firms generate within their jurisdiction, both individuals and firms. The term, state income tax is the direct tax which the state levies on one’s income. This income specifically means all your income earned from or within your state. This may also imply all your income everywhere. A state income tax is self-assessed, that is, the taxpayer files required state tax returns.
Federal income tax
Federal income tax is the tax that the IRS levies on the income of individuals and businesses. this applies to every form of earnings that constitutes the taxable income of the taxpayer such as capital gains and employment earnings. From this, we can see that the largest source of government revenue is the federal income tax. Revenue generated from this tax helps in funding and building and repairing a country’s infrastructural facilities, improving education, transportation, and the provision of disaster relief.
The revenue the government generates from this tax helps in financing the growth and upkeep of a country’s economy. The cities and states in which the taxpayers reside and operate collect these taxes and credit them to the federal government’s account.
Capital gains tax
Capital gains taxes (peculiar to investors) are levied on income that results from the sales of assets such as stocks and bonds where the selling price is more than the purchasing price.
Corporate tax
The government imposes this type of tax on the profit of a business, that is the percentage of corporate profits that the government takes to fund government programs. The government levies this tax on the taxable income of a firm.
Property tax
Property is the tax levied on an individual or other legal entities such as corporations own. It is based on the value of the property such as land, factory, car, etc. It is usually the local government where the property is located that levies the tax.
Payroll tax
This is a percentage of income that an employer withholds from his employee and then remits to the government on the employee’s behalf. This is to fund retirement benefits, medical payments, and other social security programs which are to the benefit of the employee (taxpayer). Because of the connection between these taxes and the benefits, payroll taxes sometimes refer to contributions. These payments are compulsory.
This type of tax is not the same as income tax though both are charged from the employee’s income. The difference is in the benefits of the employee such as social security and retirement benefits.
Poll tax
This is a flat rate that the government usually imposes on low-income earners.
Estate taxes
This is the tax levied on the right of the deceased to transfer his estate to his heirs or beneficiaries in an event of death as well as on certain transfers. The law enacted it as equivalent to testamentary disposition. It is not a property tax, it is a tax the designated authorities levy on the right to transfer property to the beneficiaries upon the owner’s death. This is highly dependent on the laws that are in place at the time of death.
B) Indirect taxes
These are taxes the government levies on the production and consumption of goods and services as well as transactions such as imports and exports. Here, there exists the incidence of taxation where the producers or sellers bear the initial burdens before transferring them to the final consumers in form of high prices of goods and services. In this case, consumers can avoid indirect taxes by not buying those commodities taxed. The buyer of such commodities does not usually know the amount he is paying as tax. Indirect taxes can also mean hidden taxes to the consumer or buyer of a commodity. Indirect taxes are classified into two, Ad Valorem taxes and specific taxes.
Ad Valorem taxes are imposed on commodities based on their respective values and at specific percentages. Specific taxes are the taxes imposed per unit of a commodity regardless of its value.
Indirect taxes are usually the most relevant sources of government revenue in most nations of the world.
The types of indirect taxes include sales taxes, value-added taxes (VAT), taxes on any aspect of manufacturing, taxes on legal transactions, and customs/import duties.
Import duty
This is the tax government imposes on imported goods. Therefore, it is compulsory for importers to pay these taxes before the goods leave the port.
Export duty
This is the tax government imposes on exported goods. Producers or exporters pay these taxes before exporting their goods to other countries.
Excise duty
These are taxes levied on specific goods within the country, these are locally manufactured goods such as cigarettes, beer, petrol, etc.
Sales tax
This is a consumption tax that the government imposes on the sales of goods and services and these taxes usually take the form of value-added taxes (VAT), goods and services tax (GST), state or provincial sales tax, and excise tax. Sales tax usually, varies by jurisdiction. This type of tax usually is charged at the point of sale when a customer pays for a good or service. In this case, the business collects sales tax from the buyer and remits it to the government. In this case, it is usually the final consumer who bears the final tax burden.
Purchase tax
These are taxes imposed on some consumer goods like such as cars, electronics, cosmetics, etc. and these taxes are usually collected at the wholesale stage. This tax is dependent on the value of the commodity. Luxury items attract more purchase tax rates than essential goods.
Systems of taxation
There are three systems of taxation that are being levied based on the taxpayers’ level of income. They are progressive, proportional, and regressive tax systems. Two of these systems have a high impact on high and low-income earners. That is the progressive and the regressive systems.
Regressive Taxes
This is a system in which low-income earners pay a higher tax amount while high-income earners pay lower tax amounts. This happens because the government assesses taxes as a percentage of the value of the taxpayer’s asset. This system of taxation does not correlate with the earnings of an individual.
The regressive system includes taxes like property taxes, sales taxes on goods, and excise duties on consumables. Excise taxes are usually fixed and they also form part of the price of the good or service. Though a regressive system levies the same percentage on goods and services, it is usually disproportionately difficult on the low-income group.
In other words, a regressive tax rate decreases as income increases. The tax burden falls more heavily on the low-income earners. The tax rate is higher for low-income earners than the high-income earners.
Usually, the government imposes sin taxes on commodities or activities that are not healthy to one’s health or negative to the society. These commodities or activities include cigarettes, alcohol, and gambling. The aim of this is to regulate and minimize the consumption of these products. Critics have argued that it sin tax has a very negative impact on the poor.
For example, a taxpayer pays 6% sales tax on his commodities n whether he earns $30,000 or $130,000 yearly. When he earns a lesser income, he will end up paying a greater portion of his total income than when he earns more. If an individual earns $20,000 yearly and pays $1,000 on consumables, then 5% of his income goes to sales tax. On the other hand, if he earns $100,000 yearly and pays the same $1,000 as sales tax, it implies that he only paid 1% of his income as sales tax.
Proportional Taxes
In the proportional system of taxation, taxpayers, both the high and the low-income earners pay the same percentage or proportion of their income as tax. The tax rate is the same regardless of the level of income or wealth. The motive is to create equality between marginal tax rates and average tax rates. Examples of a proportional system of taxation are gross receipt taxes, per capita taxes, and occupational taxes.
Advocates of proportional taxes believe that they trigger the economy by encouraging people to work harder because there is no tax penalty for earning more. They also believe that there is a likelihood for businesses to spend and invest more under a proportional (flat) system of taxation thereby generating more money/revenue for the economy.
In other words, taxpayers pay a set proportion/percentage of income irrespective of the amount of annual income they earn. The flat and/or fixed rate neither increases nor decreases as income rises or falls.
For example, An individual who earns $25,000 yearly as his income pays a $1,250 as a 5% rate, while another individual who earns $250,000 yearly also pays $12,500 at 5%which is the same rate.
Progressive Taxes
A progressive system of taxation imposes a higher tax rate on the higher income earners than the low-income earners. In other words, the tax burden increases as income increases and vice-versa. This system is based on the taxable amount of the taxpayer’s income. The aim of this system is to affect higher-income earners more than the lower or middle-class income earners. The presumption is that higher-income earners can afford higher tax rates than low-income earners.
Critics criticized the system of taxation that it poses a form of inequality thereby amounting to wealth redistribution as higher-income earners pay more tax to a nation that gives more support to more lower-income earners. Those that criticize the progressive tax system usually point towards the proportional system of taxation as the most appropriate alternative. In the Philippines, the progressive taxation levy of residents is up to 32%. Also, in the United States, federal taxes operate under a progressive system.
For example, a taxpayer earns $50,000 yearly and pays the tax of $5,000 which is 10% of his income. Another person earns $2000 yearly and pays $40 which is 2% of his income. This is a progressive system because the higher income earner bears more of the tax burden.
Purposes of taxation
The primary purpose/objective of taxation is to raise revenue for the government that will enable it to finance huge government expenditures. Governments finance most of their activities through taxation, though this is not the only purpose of taxation. In other words, taxation has some purposes that are non-revenue objectives. In present days, taxation is an instrument of economic policy. It has an effect on the aggregate volume of production, consumption, investment, industrial location, the balance of payments, distribution of income, etc.
- Economic development
- Full employment
- Price stability
- Control of cyclical fluctuations
- Reduction of the balance of payment difficulties
- Non-revenue objective
Economic development
Economic development is one of the important objectives of taxation. The growth of a country’s economy largely depends on the growth of capital formation. Though capital formation is the cornerstone of economic development, the less developed countries (LDCs) usually suffer from a shortage of capital. A country can overcome this when the government authorities mobilize resources to facilitate a rapid capital accumulation. The government can raise the ratio of savings to national income through adequate tax planning.
Also, by raising the existing tax rate or imposing new taxes, the government can smoothen capital formation. To effectively raise the savings-income ratio through taxation policy is a very important ingredient of economic development. Meanwhile, it is important to take proper care with regard to investment. If a country decides to channel financial resources or investment to unproductive sectors of the economy, it may jeopardize economic development then if they increase investment and savings rate. So, tax policies should be strategic in such a way that investments will take place in more productive sectors of the economy including infrastructural sectors.
Full Employment
Another objective of taxation is full employment. Because the rate of employment is dependent on effective demand, a country that desires to achieve the goal of full employment must cut down tax rates. The effect here is that disposable income will rise thereby increasing the demand for goods and services. Increased demand helps to trigger investment which will, in turn, increase income and employment through the multiplier mechanism.
Price stability
The government can use taxation to ensure price stability which is a short-run objective of taxation. This is because taxes are viewed as an effective means of inflation control. By raising direct tax rates, private spending will be under control thereby reducing the pressure on the commodity market. Imposing indirect commodities on commodities increases the chances of inflation. High commodity prices will discourage consumption on one side, and encourage saving on the other side. The opposite will be the case if the government lowers tax rates during deflation.
Control of cyclical fluctuations
Moments of economic boom and depression can be seen as another objective of taxation. During an economic depression, the government lowers taxes while during an economic boom, they reduce taxes thereby taming cyclical fluctuations.
Reduction of the balance of payment difficulties
The imposition of taxes such as customs duties aims at controlling the importation of certain goods. This is to help reduce the intensity of balance of payments difficulties thereby encouraging the domestic production of import substitutes.
Non-revenue objective
The non-revenue purpose or objectives of taxation have to do with the reduction of income and wealth inequalities. This can be facilitated through the adoption of the progressive system of taxation, that is, taxing the rich higher tax rates than the poor. These objectives here include the allocation of resources, the redistribution of income, and economic stability.
The Importance Of Taxes
The importance of taxes explains what taxes are used for and how it benefits the economy of a nation. Below are some examples that show what taxes are used for.
So What are taxes used for?
A) Importance of taxes in society
Taxation is a source of government revenue that enables them to carry out government activities. It is through taxes that governments are able to meet the demands of their society. Without taxes, this will not be possible. They are crucial as the government generates revenue from them. Tax payments help to finance social projects such as;
- Health
- Education
- Governance
Health
Obviously, the government will not be able to contribute to the health sector without taxes. They help to fund social healthcare, social security, medical research, immunization, etc.
Education
Taxes go to the educational sector which is one of the sectors that deserves to receive tax money. Governments attach lots of importance to developing human capital as well as education. they channel tax money to funding, furnishing, and the maintenance of the public education system.
Governance
Good governance is crucial in running a country smoothly as it facilitates economic progress. Poor governance on the other hand will have adverse effects on the economic growth of a country. With the existence of good governance, there is a strategic plan to collect money and utilize it to the benefit of the citizens. The money then goes to the civil servants, members of the parliaments, postal system, military officers, etc.
Social security and benefits
governments use tax money to finance the running of crucial sectors in the economy. They finance sectors that are vital for the citizens’ wellbeing such as security and environmental protection. The government channels some of the tax money towards the funding of pensions, unemployment benefits, childcare, etc. The government cannot fund such projects without taxes.
Economic growth
As stated above, taxes have a sensitive effect on the economic growth of a country, and they generally contribute to a country’s GDP. As a result of this sensitive contribution, taxes stimulate economic growth which is a favorable outcome. These favorable outcomes include job creation, an increase in the standard of living, etc.
Also, the government imposes taxes as a way of reducing undesirable activities or unhealthy consumption of commodities such as alcohol, cigarette smoking, etc. What they do is impose high excise duties on these commodities in order to make high costs of these commodities discourage consumers and producers/sellers from buying and selling them.
Infrastructural development
Tax money helps to finance the production of public goods and infrastructure for the benefit of the citizens. The transportation system, electricity, good road network, water supply, housing, etc., are some of these infrastructures that tax finance.
B) Importance of tax to businesses
Promote economic activities
For a business to survive and grow in a country, there has to be adequate infrastructure such as a good road network, telecommunication, electricity, etc. Governments help in developing these facilities through the money collected from taxes. This, in turn, helps to promote economic activities within the country.
Loans and grants for businesses
Taxation is of great importance to businesses because the government funds back this money into the economy in form of loans and grants. Recently, the government is embarking on loan schemes, grants, and aids for starting up a business or sustaining the business. The funds that facilitate these schemes are usually tax money. This activity has contributed greatly to encouraging entrepreneurship, which would have been impossible without taxes.
Raise the standard of living
Because tax helps to raise the standard of living in a country, the level of consumption also increases. In essence, when there is a high standard of living, the level of consumption will also increase thereby affecting businesses positively. There will be an increase in domestic consumption, making businesses to be able to market their products more. Taxes are important and every citizen is meant to benefit from them. This is why everyone is obliged to pay taxes. Citizens should be able to understand that taxes are not just meant to be a money grab from the government but of great benefit.
Principles of taxation
The 18th-century economist analyzed and constructed the rules that should govern the system of taxation. Though there is a need to interpret these principles from time to time, they still maintain their remarkable relevance. He propounded for general canons of taxation;
- The citizens of every state should contribute towards supporting the government as closely as possible according to their respective abilities. That is, in proportion to their respective revenues or incomes which they enjoy under the protection of the state.
- The tax which each individual is to pay has to be certain, not at random or by impulse. The tax authority should clarify the tax payment time, manner of payment, amount of payment, etc. to the taxpayer and to everyone else.
- Every tax that the government levies levied should be at the time and in the manner in which will be most convenient for the taxpayer/contributor to pay it.
- All taxes ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the state’s treasury.
The reinterpretation of these principles can take the following forms;
Horizontal and vertical equity
This principle of horizontal equity states that as far as the purpose of taxation is concerned, people in similar positions are subject to the same tax liability. In other words, people with equal taxable incomes should pay equal taxes. Vertical equity on the other hand states that people that do not have equal income or wealth should not pay equal taxes. That is, the higher-income earners should pay higher taxes while the low-income earners should pay lower taxes.
The ability-to-pay principle
This principle states that tax authorities should distribute tax burdens to individuals according to their capacity and ability to bear it. In this case, they should take into consideration the personal characteristics of every individual. The common interpretation of this principle is that the system of taxation should be progressive.
The benefit principle
Under this principle, taxes look like serving a function similar to that of prices in private transactions. In essence, they help in determining the activities that the government will undertake and who will pay for them. The implementation of this principle will cause the allocation of resources through the public sector to be in the direct favor of the consumer.
Economic efficiency
This principle requires that tax systems should be efficient, and emerges from the market economy. A good system of taxation should make tax collection to be economical. In this sense, the collection of tax should be small compared to the total revenue the government derives from the tax. In other words, they should not spend a huge amount of money on collecting tax revenue that is relatively small in amount.
Flexibility
The system of taxation should not be rigid, it should be easy to change in order to make it adaptable to changes in economic situations. For instance, there should be a possibility of the use of tax to either increase or decrease government revenue. Also, the government should be able to use taxes to cure inflationary or deflationary trends depending on the situation.
Stability
Tax laws should not be changed frequently. Whenever there is any change, it should be in the form of general and systematic tax reform. This should adequately provide for a fair and orderly transition. There there are frequent changes in tax laws, which will result in a decreased compliance. Also, it is bound to lead to behavior that tends to compensate for likely future changes in the tax code. An example is stockpiling commodities like alcohol in advance of an increased tax rate/tariff.
Cost-effectiveness
This principle states that the cost with regard to the assessment, collection, and control of taxes should remain at the lowest level that is consistent with other goals of taxation. Basically, this principle is not of primary importance to the developed countries, but in the developing countries, it is not so. in developing countries and countries that transit from socialism, the needed resources for compliance and administration are scarce. It is clear that an economy should not sacrifice equity and economic rationality for the sake of cost. The cost the government should minimize should not just be the government expenses, it should also include that of the taxpayers and the private fiscal agents such as employers who are responsible for collecting taxes through the withholding procedure and then credit them to the government treasury.
Convenience
This principle states that the method of tax collection should be convenient, it should not pose so many difficulties for the payers. In other words, tax payments should cause the taxpayers as little inconvenience as possible, let it not cause large financial inconveniences. This should be subjected to the limitations of higher-ranking tax principles. Governments should allow the payment of very large tax liabilities to be in installments and there should be a generous and sufficient time limit for the taxpayers to complete those returns. For example, The Pay As You Earn (PAYE) system is very convenient especially for salaried workers because they usually deduct the tax before paying workers their net salaries.
Incidence of taxation
Incidence of taxation refers to the tax burdens with regard to where or whom the final burden rests. This final burden rests on the final taxpayer or the purchaser. There are two types of incidence of taxation namely;
- Formal incidence
- Effective incidence
Formal incidence
This refers to the initial tax effects on the tax object. It shows and explains where the initial burden of tax lies. In this case, a direct taxpayer is the one who bears the initial tax burden. For the indirect taxes, the producers or the middlemen are the ones who bear the initial tax burden.
Effective incidence
This incidence of taxation is referring to the one who bears the final burden. A direct taxpayer bears the entire burden of taxation, that is both the formal and effective incidence. To simplify the explanation, an income taxpayer bears the full tax burden since he does not shift his income to another person and the full amount of tax reduces his income. For indirect taxes, either the producer or the consumer bears the tax burden or may be shared between the producer/seller and the consumer.
The extent to which the producer/seller or the final consumer will bear tax burdens will be dependent on the elasticity of demand for that commodity that is taxed or the tax base.
a) When demand is perfectly inelastic
It is easier for the seller/producer to shift the whole tax burden to the consumer if the commodity has a perfectly inelastic demand. Here, the price of the commodity increases by the full amount of tax thereby making the incidence be on the buyer of that commodity being taxed. The seller will be able to pass the entire burden to the buyer in form of higher prices of goods because the increase in price does not amount to any change in the quantity demanded.
b) When demand is perfectly elastic
When the demand for the taxed commodity is perfectly elastic, the producer or seller will be the one to bear the whole tax burden. As it is in perfectly elastic demand, a slight increase in price will cause the demand for that commodity to fall to zero. The same thing applies to the taxed commodity. An attempt to transfer the whole tax burden to the seller in form of higher prices will cause the demand for that taxed commodity to fall to zero. By implication, the seller cannot pass the tax burden to the buyer/final consumer.
c) When demand is fairly elastic or fairly inelastic
When the demand is fairly elastic or inelastic, the tax burden will be shared between the producer/seller and the buyer/consumer. The more the demand for the taxed commodity is inelastic, the more of the tax burdens will be on the seller or the producer. On the other hand, the more elastic the demand for the taxed commodity is, the greater portion of the tax burden will rest on the producer/seller.
d) When the demand is unitary elastic
When the demand for the taxed commodity is unitary elastic, the tax burden will be shared equally between the producer/seller and the consumer/buyer.
Internal revenue service (IRS)
The internal revenue service (IRS) is the governmental body or agency in many countries that are responsible for the collection of taxes as well as the enforcement of tax laws. It is an important governmental organization that helps in facilitating the generation of government revenue through the collection of taxes. This in turn will help in providing room for economic growth and development. Without the existence of the IRS, it will be difficult for the government to effectively collect and enforce tax collection. The IRS serves as an agency responsible for performing this vital function. This government body is a major instrument of economic growth.
What does IRS do?
The law granted the internal revenue service the authority to perform many functions including the following;
a) Administer tax laws
The internal revenue service administers tax laws by issuing regulations and guidance. This government body processes federal tax returns and collects revenue on behalf of the government.
b) Enforce tax laws
The government body does this by auditing taxpayers as well as pursuing civil penalties. Also, the IRS is responsible for carrying out criminal investigations of individuals and businesses that tend to be suspicious in the aspect of fraudulent activities. The agency takes civil actions against those who refuse to pay taxes as they are obliged to. Here, the authority will collect these taxes through diverse civil actions including referring the offender’s case for prosecution in the criminal court.
c) Assist taxpayers
The internal revenue service also functions in the area assisting taxpayers to understand and comply with their civil obligations. One of the vital ways the IRS does this is by making available a taxpayer helpline. They receive calls from individuals and businesses who need clarity on the issue of taxation. The agency also recommends that taxpayers file tax returns electronically.
d) Issues taxpayers identification number (TIN)
The internal revenue service is responsible for issuing taxpayers identification numbers (TIN) to taxpayers. The taxpayers are to visit the IRS office with some relevant documents such as the memorandum & articles of association, certificate of incorporation, company seal, utility bills, application letter, duly filled TIN application form, and other required documents. The IRS will commence the processes and issue TIN to the taxpayer (individual or business).
IRS payment
IRS payment can take place in the bank account via the taxpayer’s bank account. Also, making such payments can take place by choosing an approved payment processor to pay via credit or debit card with a fee charged. Other ways of making payments to the IRS include the electronic federal tax system, electronic funds withdrawal, cash payments, etc. Tax payments can also take place in installments (say monthly) and this usually takes place by applying for a payment plan which includes an installment agreement.
Tax filing
Filing is the act of submitting tax returns by a taxpayer to the tax authority, reporting income, expenses, and other tax information. This takes place in a manner that the law prescribes and this is to be in accordance with the laid down administrative procedure. Tax filing is a legal obligation that every taxpayer must fulfill. This obligation of filing tax returns is usually a requirement under specific tax law. The law is specific about the nature of required information, its frequency, and the manner of filing tax returns.
The tax authority on the other hand must carry out the obligation easing the process of tax filing by making the necessary facilities available such as forms, guidelines, and procedures. This guide provides relevant information with regard to the tax returns which the taxpayer must file with the IRS.
Tax returns are reports that the taxpayers prepare, these reports contain information regarding his tax affairs for a specific given period. Tax filing is necessary for the purpose of compliance with the tax laws.
Usually, the internal revenue recommends that taxpayers file their tax returns electronically.
Tax Evasion and tax avoidance
Tax evasion
This refers to an illegal act in which a taxpayer deliberately avoids paying his actual or true tax liabilities. For those who engage in tax evasion, the law generally subjects them to criminal charges and other substantial penalties. A willful failure of tax payment is a federal offense under the IRS tax code. The act of evading tax can be either the illegal non-payment of tax or the underpayment of actual tax liabilities that are due. The IRS can determine tax evasion irrespective of whether the taxpayer files tax returns with the agency or not. For the IRS to determine tax evasion, it must be able to show evidence that the avoidance of taxes was willful on the taxpayer’s part.
Tax avoidance
Tax avoidance refers to the legal way of minimizing the amount of income tax which an individual or business owes. The taxpayer can accomplish this by claiming as many deductions and credits as are allowable. He can also achieve this through the prioritization of investments that possess tax advantages such as buying tax-free municipal bonds. The term, tax avoidance is different from tax evasion which is an illegal method of avoiding paying taxes or the underpayment of taxes.
Tax Evasion Vs tax Avoidance
Tax evasion is an activity that requires the use of illegal means to avoid the payment of proper taxes while tax avoidance uses legal mechanisms to reduce the tax obligations of the taxpayer.
Frequently asked questions
What is the purpose of taxation?
The purpose of taxation is to generate revenue for the government which in turn enables it to finance government expenditures. Other purposes of taxation include economic development, full employment, price stability, control of cyclical fluctuations, reduction of the balance of payment difficulties, and non-revenue objective. The non-revenue objective includes the reduction of income and wealth inequalities in an economy.
What is taxation in Economics?
Taxation in Economics refers to the principal method through which governments generate revenue into their budget. This helps to facilitate economic transactions such as the provision of public goods and infrastructure.
What are the three principles of taxation?
The four major principles Adam Smith propounded are;
- The citizens of every state should contribute towards supporting the government as closely as possible according to their respective abilities. That is, in proportion to their respective revenues or incomes which they enjoy under the protection of the state.
- The tax which each individual is to pay has to be certain, not at random or by impulse. The time of payment, manner of payment, amount of payment, all should be made clear and plain to the taxpayer and to everyone else.
- All taxes levied should be at the time and in the manner in which will be most likely convenient for the taxpayer/contributor to pay it.
- All taxes ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it presents to the state treasury.
What is taxation and its types?
Taxation is the act of assessing taxes which involves the imposition of taxes, collection of taxes, keeping accounting records, and auditing those tax records. It is classified into two types; Direct and indirect taxes.
What are the three types of taxes?
The three systems of taxation are;
- Regressive system
- Proportional system
- Progressive system
See the systems of taxation above.
What are taxes simple definition?
A tax is simply defined as a compulsory contribution sum which the government agency levies on individuals and organizations or on properties.