1. Government Finances and Taxation

2. Functions of Taxation To raise money for government expenditure.
To redistribute wealth.
To achieve desirable social objectives.
To provide merit goods.
To provide public goods.
Acts as an automatic stabiliser.
To achieve some economic objectives such as:
Reduce inflation
To encourage investment in certain industries
Balance the balance of trade
Protect particular domestic industries.

3. Adam Smith’s Canons of Taxation
Equity – it should take into account the ability of people to pay the tax.
Certainty – people should know their tax liability at the start of the year.
Convenience – the method of payment should suit the taxpayer, not the government.
Economy – the revenue from the tax should far exceed the cost of collecting it.
Modern Aspects
Taxation should not act as a disincentive to work.
Taxation should not act as a disincentive to investment.

4. Progressive, Regressive and Proportional Taxes
A progressive tax takes a higher percentage of income from a person as that person’s taxable income increases, e.g. PAYE.
A regressive tax takes a higher percentage of income from a low-income earner than from a high-income earner, e.g. VAT.
A proportional tax takes a constant rate of tax from income as income rises.

5. The Impact / Imposition of Taxation
This refers to the individuals or companies on whom the tax is actually levied (imposed).
These have to pay the tax directly to the government.
For example:
The excise duty on petrol is imposed / levied on the petrol companies.

6. The (Effective) Incidence of a Tax
This refers to the people who bear the burden of the tax.
For example:
The tax on petrol is levied / imposed on the petrol companies. They pass this on in the form of increased prices to the motorists.

7. Forms of Taxation Direct taxes
These are taxes on all forms of income, for example:
PAYE
Capital Gains Tax
Capital Acquisition Tax
DIRT.
Indirect taxes
These are taxes on transactions, for example:
VAT
Customs Duties
Excise Duties
Stamp Duties.

8. Advantages of Direct Taxation
It is a progressive tax – equity.
It is a convenient form of taxation for most PAYE workers.
It is economical – employers collect the tax and pass it on to the revenue commissioners. No fee is paid to the employer.
There is certainty of liability. Tax rates and tax bands are announced in the budget before the commencement of the tax year.
It simplifies government budgeting as national levels of income are well known.

9. Disadvantages of Direct Taxation
High rates of tax may discourage work and /or investment.
Direct taxes can be avoided by those working in the “black economy”.
If there is a small tax base then the burden of tax may be great on those paying the taxes.

10. Advantages of Indirect Taxation
People can reduce the amount of tax they pay by altering their consumption to those goods that carry a low rate of VAT.
Evasion of tax is almost impossible as everybody spends money in shops.
It is a cheap form of tax to administer as producers / retailers collect it free of charge. Thus there is economy of taxation.
The taxpayer often does not even realise that he / she is paying any tax as it is included in the price of the good. Thus there is convenience of taxation.
It is unlikely to act as a disincentive to work.

11. Disadvantages of Indirect Taxation
It is a regressive tax system. It does not take into account a person’s ability to pay the tax.
It lacks certainty. The government can never accurately forecast its revenue from these taxes.
Indirect taxes add to inflation. This may make Irish goods less competitive on both the foreign and the domestic markets.
These taxes increase the cost of living. They often lead to demands for wage increases which add further to cost push inflation.
Indirect taxes add to the administration costs of the business community and takes up much labour time for which there is no return.

12. Different Taxes
Ad valorem tax takes a given percentage of the price of the good.
A specific tax is levied at a given absolute amount on each unit of a good sold; for example, 10¢ on a litre of petrol.
A proportional tax takes a constant rate of tax from income as income rises.
A lump sum tax is a fixed sum of tax levied on a firm irrespective of its level of income / profit.
Capital Gains tax is a tax on the profits from the sale of assets.
Capital Acquisition tax is a tax on gifts received or on inheritances.

13. Government Finances
Balanced Current Budget planned current income = planned current expenditure
Surplus Current Budget planned current income > planned current expenditure
Deficit Current Budget planned current income < planned current expenditure
Balanced Budget planned total income = planned total expenditure
Surplus Budget planned total income > planned total expenditure
Deficit Budget planned total income < planned total expenditure.
A Neutral Budget is one that is neither inflationary nor deflationary.

14. Government Finances
Exchequer Balance The difference between total current and capital expenditure and total government income.
General Government Balance (GGB) Total income minus expenditure of all arms of government, both local and national.
National Debt The total outstanding amount of money borrowed by central government and not repaid to date, less liquid assets available for redemption of those liabilities at the same date.
General Government Debt (GG Debt) This includes the National Debt, as described above, as well as Local Government debt and some other minor liabilities of government.
Dead-weight debt or borrowings This is borrowed money that is not self-financing
Rolled Over Debt This is the substitution of an old debt for a new one.