Public Finance

Public Revenue

Income of government through all sources is called public income or revenue

Public revenue includes income from taxes, prices of goods and services supplied by public enterprises, revenue from administrative activities such as fees, fines etc., and gifts and grants

Sources of public revenue

I Taxes II Non-tax revenue, and III other sources.

Tax Revenue- a tax is a compulsory contribution for which there is no direct return. Prof. Seligman, a tax is “a compulsory contribution from a person to the government to defray the expenses incurred in the public interest of all, without reference to special benefits conferred”. Dr Dalton defined a tax as “a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the tax payer in return”.

Features: the following are the characteristics-

a. It is a compulsory contribution.

b. The tax is paid by the payer to enable the government to incur certain expenses in common interest of the society.

c. The payment of a tax does not entitle the tax payer to receive any direct benefit.

d. There is no relation between the tax paid and the benefits that he may receive

Types of Taxes:

The taxes are generally classified as

1. Direct Taxes: A direct tax is that tax whose burden is borne by the person on whom it is imposed- personal income tax, gift tax, corporation tax, death duty, wealth tax, capital gains tax
2. Indirect taxes: An indirect tax is paid by one individual but the burden is borne by another individual. sales tax, vat, goods and services tax, excise duty, customs duty

Non-tax revenue sources

A. Administrative Revenue: they generally arise as a by-product of the administrative functions of the government-

1. Fees: Seligman a fee is “a payment to defray the cost of each recurring service undertaken by the government, primarily in the public interest, but conferring a measurable special advantage on the fee payer”.
2. Licence Fee: A licence fee is charged to grant permission to a person to perform services by himself

c. Special assessment: Prof. Seligman, defined special assessment as, “a compulsory contribution, levied in proportion to the special benefit derived to defray the cost of a special improvement to property undertaken in the public interest.”

d. Fines and Penalties- government imposes fines and penalties on those persons who violate the laws of the country

e. Forfeitures- Forfeitures of basic surety or bonds refer to the penalties imposed by courts

f. Escheat: It refers to the claim of a government to the property of a person who dies without having any legal heirs

B. Commercial revenue

The revenues which Taylor called “commercial” are received in the form of prices paid for government produced goods and services. The price is, therefore, a contractual payment made by the citizens to the government for the goods and services sold to them

C. Other Sources

1. Gifts, donations and grants: Gifts and donations are voluntary contribution from the citizens or the non-governmental donors to the government fund for specific purposes. Grants are given by the federal government to the state or provincial governments to meet the cost of specific projects
2. Income from government property: Income from public property such as lease of property owned by the government, royalty from mines and oil fields

c. Receipts from printing press: Dalton refers to the use of printing press for the purpose of meeting public expenditure by the issue of new paper money.

d. Borrowings: The government borrows from public in the form of public debt

e. Miscellaneous sources: The government also derive revenue from tributes and indemnities, lottery, auctions of confiscated vehicles and things

Canons of Taxation

1. Canon of Equity or Equality: Adam Smith “The subjects of every state ought to contribute towards the support of the Government, as nearly as possible, in proportion to their respective abilities, that is, in proportion to their revenue which they respectively enjoy under the protection of the State“.
2. Canon of Certainty: to Smith “the tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of tax payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.”

3. Canon of Convenience: it should be imposed at such a time and in such a manner that the tax payer feels minimum inconvenience. According to Smith, “every tax ought to be levied at the time or the manner in which it is most likely to be convenient for the contributor to pay.”

4. Canon of Economy: According to this canon, the tax should be such as to bring the maximum part of the collected revenue into the government treasury. In other words, the cost of collection should be the minimum

5. Canon of Productivity: it should bring large revenue which should be adequate for the public authority

6. Canon of Elasticity: Taxes, which can be increased or decreased, according to the demand of the revenue

7. Canon of Variety or Diversity: A tax system should contain a large variety of taxes on persons and commodities

8. Canon of Flexibility: flexibility means that the entire tax system should be flexible enough that the taxes can easily be increased or lowered, in accordance with the government needs

9. Canon of Simplicity: It should be simple to calculate how much is it to be paid and also understandable to the common man