No taxation without representation” shouted British-American colonies in 1776. When King George III sent an army to enforce taxes, the colonies rebelled. With the help of French armies, they defeated British forces and gained their independence.
Most people expect the government to render them services such as security from crime, defence from external aggression, health and education. For government to render such services, it must have money. The main source is taxation. Yet, not many people welcome the face of the tax collector. In the time of Jesus, Jews treated the tax collector with contempt as a sinner.
Apart from serving as the sources of revenue, taxes are imposed for other purposes depending on the ideology pursued by the government. Some of these purposes are:
a). Redistribution. Politician or policy makers wedded to egalitarianism use some taxes to reduce gross inequalities of income. They impose higher rates of taxation on high incomes. They use the proceeds to pay for the social services of the poor such as education and health.
If the super taxes are too high, they may discourage effort and entrepreneurship. When a person realises that by working hard, his income will be taxed away he will lose the incentive to work harder. Similarly, a company whose profit will be subjected to unreasonably high rate of taxation may decide to pull out of the country and relocate in another country.
Countries which want to attract foreign direct investment (FDI) must take note of what other government are charging by way of corporation tax.
b). Encouragement. In countries where populations are falling and this is considered as weakening the country, a government may charge married couples a lower tax than individuals and may give tax exemption to couples that have children. This is done through direct taxes to be explained below.
c). Discouragement.The taxing authority may wish to discourage certain vices, such as drunkeness and smoking by imposing high indirect taxes. A Russian Tsar (emperor) in the 18th century used to impose higher taxes on men who did not shave their beards in order to discourage the practice.
d). Persecution.Historically have existed regimes which have imposed higher taxes on religious minorities to compel them to embrace the State religion.
e). To obtain labour. At the beginning of European rule in Africa, most Africans were not keen to go and work on European farms. The colonial powers imposed poll taxes to force men to go and work on European farms. This is a far cry from todays ear when people will brave the oceans to go and work for Europeans in Europe.
The canons of taxation
In order for a tax system not to alienate taxpayers certain principle must follow, these are:
a). Efficiency. The mode of collection should be devoid of wastefulness. It does not make sense to spend K10 000 trying to collect a tax that will yield only K5 000.
B). Ability to pay.People must be taxed according to their ability to pay. What is taken from a person should be less than what is left with him or her.
c). Simplicity. A tax system must be simple enough for the average taxpayer to understand.
Types of taxes
There are basically two types of taxes. Direct taxes are paid to the revenue authority by the taxpayer. These are incomes on labour (income taxes), wealth and income on profit (corporation or company taxes).
Indirect taxes are paid by consumers or purchasers of goods. Such as customs duties, sales taxes, value added taxes. They are collected by firms and paid to the revenue authority such as Malawi Revenue Authority (MRA).
When people complain that a tax is unfair to poor people, they take into account taxes imposed on goods that are bought and consumed by the poor. Generally, poor people spend a bigger fraction of their income on food than the rich. Deciding which goods to tax and which to exempt is not easy because those bought by the rich may also indirectly be bought by the poor. Petrol for example is bought by bus owners who are rich but if you raise taxes on petrol the bus owner will raise fares and the poor will ultimately bear the burden.
The collection of both direct and indirect taxes is sometimes tricky. For people who rely on a salary, personal income is easier to determine than for self employed persons. How do you assess the income of flea market vendors?
The collection of sales taxes meets the problem that the seller may not issue a receipt to the buyer and there may not be an accurate total of sales made.