Role of government 2
Yvonne Harvey, Contributor

It is so good to be with you again. I trust that you are all okay. Those of you who are doing the SBA component should be working hard at it. At the same time, you should be endeavouring to complete the syllabus and do some ongoing revision. Today we continue to look at the role of government, by looking at government's role in taxation.

The role of taxes

A tax is a compulsory payment levied on individuals and businesses by the government. It forms a major part of government revenue. Taxation is the process of paying taxes to the government.

The role or purpose of taxation:

• Government revenue is used to provide utilities, public and merit goods and to pay MPs, civil servants and other government workers.
• Taxes are also used to influence the consumption of goods or services considered by government to be harmful, for example cigarettes and alcohol.
• Governments use taxation to reduce the inequality, in terms of income and wealth, between the rich and the poor, eg through progressive taxation.
• Taxes may be used to lessen imports (import duties - indirect tax) and thereby reduce balance of payments deficits.
• They are also used for the protection of infant industries.

Forms of taxes

A tax may take one of three forms:

PROPORTIONAL

Every taxpayer pays the same proportion or percentage of his income in tax. In Jamaica, 25 per cent is paid on income after the tax-free income is taken out.

PROGRESSIVE

A taxpayer with a higher income not only pays more taxes, but also a larger proportion or percentage of his income in tax.

REGRESSIVE

This represents a smaller proportion of a wealthier person's income than the poorer person's income. All indirect taxes (taxes on goods and services) are, by nature, regressive.

Types of taxes

Taxes are either direct or indirect.

Direct taxes are taxes on income. They are called direct since they are levied directly on the individual citizen or company. These taxes are either proportional or progressive. Examples are:

INCOME TAX

This is by far the most important source of revenue to most governments and is usually collected by the PAYE (Pay As You Earn) system, which is a convenient way to pay the tax.

CORPORATION TAX

This is similar to income tax but is levied on the profits of companies rather than individuals.

DEATH DUTIES

This is placed on money, land, house, etc left by a dead person. It is paid by the person who has inherited such.

CAPITAL TRANSFER TAX

The recipient of capital goods such as land or property has to pay a tax on the value of the goods transferred.

CAPITAL GAINS TAX

This is paid on the increased value of assets sold, if the assets are sold for more than they were obtained for.

UNEMPLOYMENT LEVY

This is a form of social security contribution, for example in Trinidad and Tobago.

RATES AND PROPERTY TAXES

These are paid on the unimproved value of the property.

STAMP DUTY

This is payable on cheques, receipts, contracts, sale of house and land, etc.

EDUCATION TAX

Note - NIS and NHT are not taxes, they are contributions.

Advantages of direct taxes

1. They are easy to collect since they are levied directly on the person who is to pay.

2. They are easy to administer since they are collected mostly by the PAYE system.

3. The rate charged can be varied to suit the circumstance of the taxpayer, for example, progressive tax.

Disadvantages of direct taxes

1. Expensive to collect and administer.

2. There are sometimes disputes regarding amounts to be paid.

3. Sometimes people forget to put aside amounts to be paid hence the PAYE system.

Indirect taxes are taxes on goods and services. These are only paid when people buy the goods and services that are taxed. They are called indirect because the average taxpayer pays them indirectly. The tax is paid to the seller or importer who passes it on to the consumer in the form of higher prices. The tax collected is then passed on to the government. These taxes are regressive, since the person with the smaller income pays a larger proportion of his income in tax than the higher-income earner. These are specific or ad valorem - tied to the value of the good). Some examples are:

PURCHASE TAX

Usually paid by the manufacturer when he sells goods to the retailer, example GCT.

IMPORT DUTIES/TARRIFS

Paid on imported goods and services to reduce these imports.

EXCISE DUTIES

Similar to import duties, but levied on certain home-produced goods in order to reduce their production and consumption, example alcohol and cigarettes.

VALUE ADDED TAX (VAT)

Levied on goods at each stage of production.

STAMP DUTY

This is sometimes seen as an indirect tax if paid when goods or services are purchased.

Advantages of indirect taxes

1. Easy and cheap to collect.

2. Difficult to evade since it is paid with the purchase of goods and services.

3. Foreigners and tourists pay these also.

4. Usually no argument on the amount to be paid.

Disadvantages of indirect taxes

1. They tend to be regressive, that is, rich and poor pay the same percentage.

2. They tend to increase the cost of living and may discourage trade.

3. Governments are uncertain about how much tax will be collected as it varies with the demand for the goods and services.

Our analysis of the role of government is not yet complete. In the next lesson we will continue to dig deeper into the topic. Do have yourselves a wonderful week.

Yvonne Harvey teaches at Glenmuir High School. Send questions and comments to kerry-ann.hepburn@gleanerjm.com