PAD370 MDM SAREHAN

CHPT 4

1. DEFINITION OF TAXATION

Taxes is a compulsory contribution by the public authorities. It is the major source of

government. In other words, taxes are levied by governments primarily as a means of raising
revenues to finance operations of government. For examples, income tax, road tax, corporate
tax and sales tax. Taxes consist of direct tax and indirect tax. A tax is not a voluntary payment
or donation, but an enforced contribution obtain in accordance to legislative authority.

2. FOUR OBJECTIVES OF TAXATION 10M

One of the objectives of taxation is redistribution of income. The distributive goals are
usually sought through the use of progressive rate structures, the imposition of high taxes on
those with greater ability to pay. Higher tax rates on higher-income individuals may limit their
accrual of wealth and may also finance transfers to persons with lesser means. Lower tax rates
on lower-income individuals correspondingly represent an attempt to provide them with
government services at little cost.

Other than that is equality. Equity among equals means that those with equal ability to pay
taxes, all other things being equal, should pay the same tax. In case of income tax, for example,
this principle suggests that those with equal incomes should pay equal income tax.

Besides, Price Stability is also one of the objective of taxation. Taxation can be used to
ensure price stability. Taxes are regarded as an effective means of controlling inflation. By
raising the rate of direct taxes, private spending can be controlled. Naturally, the pressure on the
commodity market is reduced. But indirect taxes imposed on commodities fuel inflationary
tendencies. High commodity prices, on the one hand, discourage consumption and, on the other
hand, encourage saving. Opposite effect will occur when taxes are lowered down during
deflation.

Furthermore, another objectives of taxation is that taxation assists in reducing

consumption of unwanted goods. Taxes as such can be used as an effective tool to reduce the
consumption of unwanted goods like alcohol. Higher taxes on such goods reduce the
consumption as the price of the product will be very high for the consumers.

In addition, Government also uses taxes as a way to protect local industries and as such
make them more profitable. Increasing tariffs on imports and charging lower taxes to local
products may boost the demand for goods and services produced by domestic industry. Taxes
on imports, which are called tariffs, can be used by government to correct an unfavorable
balance of payment situation by increasing the tariffs. This will result in imports becoming
expensive and will cause a fall in demand for the imported goods.
3. FOUR CHARACTERISTICS OF A GOOD TAX SYSTEM 10M

The first characteristics for tax is Equality which means that what people pays for tax
should always be in proportion to what they earn (income). Also, the system should ensure
that there is fairness in payment of tax so that no particular section of the society is
overburdened. A tax system must ensure that citizens fairly contribute towards the running of
government, to the extent of their ability to pay; and the benefits from goods and services that
a government provides.

The second tax characteristics has to do with Certainty. This means that tax liabilities
should be clear and certain, rather than arbitrary. In other words, the tax should be easily
understood in terms of the amount and method of payment. Therefore, it is necessary that the
tax laws are clear and the taxpayer is able to predict, with a reasonable certainty what his tax
liability is likely to be.

The third is convenience of Tax payment, that taxes should be collected at a time and in
a manner that is convenient for the taxpayer. In other words, the system should consider the
convenient time when the payers have money otherwise, they may find it difficult to pay.
Since the tax-payers make sacrifices when they pay the taxes, it is essential for the
government to see that they are not put to any avoidable inconvenience.

The fourth characteristics of a good tax system is Elastic. A good tax system should be
sufficiently elastic so that the tax revenue may be increased or decreased according to the
requirements of the state. Two things are essential to bring about elasticity in the tax system.
First, there should be proper blending of direct and indirect taxes. Secondly, certain sources of
income should be exclusively reserved for emergencies.

Universal application of taxes is also one of the characteristics of a good tax system.
Each individual should pay according to his ability to pay, and the individual possessing the
same ability to pay should contribute the same amount by way of taxes without any
discrimination. In India, income tax is lacking these characteristics because income from
agriculture is not taxed to the extent the incomes have been taxed in the non-agriculture
sector.
4. TYPES OF TAX

Taxes are divided into three structures based on the rate of taxation. The first type of
taxation is th proportional tax. A proportional tax is a tax which is imposed at the same rate
for all income levels. The tax rate remains constant regardless of whether income increases or
decreases. This can be seen when low-income taxpayers would pay 10%, middle-income
taxpayers would pay 10% and high-income taxpayers would also pay 10%. Sales tax is an
example of a proportional tax as all consumers, regardless of their income, will pay the same
fixed rate.

Another type of tax is progressive tax. A progressive tax is a tax which goes on
increasing with income. The higher the income, the higher the percentage of tax. A
progressive tax can be charged to obtain revenue to help the poor. For example, a wealth or
property tax, a sales tax on luxury goods, or the exemption of sales taxes on basic necessities,
may be describe as having progressive effects as it increases the tax burden of higher income
families and reduces it on lower income families.

Besides, regressive tax is also one of the type of taxation. A regressive tax is a tax rate
which falls with an increase in income. A regressive tax is the opposite of progressive tax.
The higher the income, the lower the percentage of tax. For example, government apply sales
taxes uniformly to all consumers based on what they buy. Even though the tax may be
uniform, lower-income consumers are affected. In other words, although the amount is the
same, it constitute a more significant burden on the family with the lower-income, hence
making it a regressive tax.

5. TWO SOURCES AND CLASSIFICATION OF TAXES 10M

Direct taxes are one of the sources of taxes. Direct taxes is a tax paid by the persons on
whom it is charged and cannot be passed to other persons. In other words, it is a tax which is
paid directly by those on whom it is levied.it is levied directly on the income or assets of
individuals or companies. For example, income tax, corporation tax, petroleum revenue tax,
and other taxes such as stamp duties as well as motor vehicle duties. The advantage of income
tax is that it is easy to collect.

Meanwhile, the other source of taxes are indirect taxes. Indirect tax is a tax on which the
burden can be passed on to another persons. It is collected by the custom and excise department.
In other words, direct tax are included in the price of goods and services we buy. It is collected
from the people who make or sell goods and provided the services but the tax on each item is
added to the price paid by the consumer who pays indirectly without knowing it. For example,
sales tax, service tax, excise duty, import and export duties and value added tax. Hence, they are
generally regressive because they fall more on the poor than on the rich.
6. CLARIFY ANY DIFFERENCES BETWEEN DIRECT AND INDIRECT SOURCES
OF TAXATION SYSTEM IN MALAYSIA 25M

There are different implications of direct and indirect taxes on the country. However,
both types of taxes are important for the government as taxes include the major part of
revenue for the government. One of the differences between direct and indirect sources of
taxation system in malaysia is regarding on who the taxes are levied and paid for by. Direct
tax is levied and paid for by individuals, firms, companies etc. Whereas indirect tax is
ultimately paid for by the end-consumer of goods and services.
Next, the other differences between direct and indirect sources of taxation system in
malaysia is that regarding the burden of tax. The burden of tax cannot be shifted in the case
of direct taxes where the tax cannot be passed on to another person. Meanwhile burden can
be shifted for indirect taxes. For example, the burden of tax can be passed on to another
persons.

Besides, another differences between direct and indirect sources of taxation system in
malaysia is regarding inequalities. Direct taxes help in reducing inequalities and are
considered to be progressive. This can be seen when a progressive tax is a tax which goes on
increasing with income. The higher the income, the higher the percentage of tax. A
progressive tax can be charged to obtain revenue to help the poor. Meanwhile, indirect taxes
enhance inequalities and are considered to be regressive. A regressive tax is a tax rate which
falls with an increase in income. A regressive tax is the opposite of progressive tax. The
higher the income, the lower the percentage of tax. For example, government apply sales
taxes uniformly to all consumers based on what they buy. Even though the tax may be
uniform, lower-income consumers are affected.

Furthermore, another differences between direct and indirect sources of taxation system
in malaysia is regarding the evasion of tax. The evasion of tax is possible in the case of a
direct tax if the proper administration of the collection is not done. Whereas, in the case of
indirect tax, the evasion of tax is not possible since the amount of tax is charged on the goods
and services.

Another differences between direct and indirect sources of taxation system in malaysia is
regarding when the tax will be collected. Direct tax is collected when the income for
the financial year is earned or the assets are valued at the date of valuation. As against this,
the indirect taxes are collected, when the purchase or sale of goods or services are rendered.

Both direct and indirect taxes are important for the country as they are intricately linked
with the overall economy. As such, collection of these taxes is important for the government
as well as the well-being of the country. Both direct taxes and indirect taxes are collected by
the central and respective state governments according to the type of tax levied.
7. ISSUES IN TAXATION

One of the issues in taxation is tax evasion. Tax evasion happens when the taxpayer
refuses to pay tax by not declaring his real income. In other words, tax evasion is a criminal
offence which involves deliberately misrepresent the true state of their affairs to the tax
authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring
less income, profits or gains than the amounts actually earned, or overstating deductions.

Besides, another issue in taxation is tax avoidance. The issue of tax avoidence, on the
other hand is when the taxpayer reduces his amount of income by working less hard because
of the burden of paying higher taxes especially when the tax rate is very steep.

Furthermore, red-tape and bureaucracy is also one of the issues in taxation. Red tape in
Malaysia may have already cost the country billions in revenue losses.

Other than that, procedure in tax payment is another issue in taxation. The procedure in
tax paymnet are not friendly user hence burdening the taxpayers.

8. DEFINITION OF PUBLIC BORROWING

According to Shaari and Jomo, public borrowing are defined as “total debt of central
government either from internal of external sources”. in other words,public borrowing is the
total amount of money that has been borrowed by the government. The other terms used to
refer to public borrowing are government debt, national debt or public debt.
The government issues bonds and securities for borrowing money.the government debt, also
owned know as public debt or national debt is money or credited owed by any level of
government, either central government, federal government, municipal government or local
government. As government represents the people, government debt can be seen as an
indirect debt of the taxpayers.
9. OBJECTIVES OF BORROWING 10M

One of the objectives of borrowing is to overcome economic recession. In a recession,

government tax revenues fall (e.g. people earn less so pay less income tax). Also, the
government have to spend more on unemployment benefits. Therefore, in an economic
downturn, borrowing rises. To eliminate borrowing in a recession would make the recession
worse and increase inequality. If the government couldn’t borrow in a recession, the
unemployed may not get any benefits and have no income. Also, higher taxes and lower
spending would reduce domestic demand and make the recession even worse.

Other than that, to help finance in War. During a war, government spending is stretched
leading to higher borrowing. The highest rates of borrowing occurred during the two world
wars. Also, during wars, it may be easier to sell bonds as you can play the patriotic card to
encourage people to finance government borrowing.

Besides, another objectives of borrowing is to finance economic development. For the

economic development, the huge amount of investment is needed. But, in poor countries, they
do not have sufficient balance. So they raise the public loan.

Furthermore, to overcome temporary budget deficit is also one of the objectives of

borrowing. Tax revenues are less than predicted. Borrowing means the government can meet
a temporary shortfall by borrowing, rather than having to immediately cut back on spending.
Like an overdraft facility, government borrowing gives the government more flexibility and
means they can maintain wages and spending commitments without having to keep cutting
spending.

10. TWO TYPES OF DEBT 10M

On the criteria of purposes of loans, public debt may be classified as productive or

reproductive and unproductive or deadweight debt. Public debt is productive when it is used
in income-earning enterprises. Or productive debt refers to that loan which is raised by the
government for increasing the productive power of the economy. A productive debt creates
sufficient assets by which it is eventually repaid. If loans taken by the government are spent
on the building of railways, development of mines and industries, irrigation works, education,
etc., income of the government will increase ultimately. Productive loans thus add to the total
productive capacity of the country.
 Public debt is unproductive when it is spent on purposes which do not yield any income
to the government. This type of debt is also known as static debt as well as dead loan. For
example, refugee rehabilitation or famine relief work. Loans for financing war may be
regarded as unproductive loans. Instead of creating any productive assets in the economy,
unproductive loans do not add to the productive capacity of the economy. That is why
unproductive debts are called deadweight debts. Indeed, this type of debt is not profitable but
are made for the sake of government.

11. PUBLIC DEBT AND ITS IMPLICATIONS

When is public debt good? (adv)

Public debt is a good way for countries to get the extra funds needed to invest in their
economic growth. It is expected to yield positive returns to the economy when used correctly.
It will help improve the standard of living in a country. That is because it allows the
government to build new roads and bridges, improve education and job training, and provide
pensions. This will spur the peoples’ confidence and raise current spending more instead of
saving for retirement. This spending by the people of the country will further boost economic
growth though greater business activities, capital expansion and job creation.
Meeting Wartime Expenditure: The unwarranted situation arising out of war and the
prosecution of war cannot be possibly met out of ordinary tax-revenue. Hence, the
government has to resort to public borrowings to collect sufficient funds to meet the cost of
war. There is no other way left with the government to meet this abnormal expenditure.
Coping with Depression: In order to fight against depression in the economy, the
government generally goes in for public debt. The depression brings an atmosphere of despair
and frustration specially among producer because of low demand for goods and services due
to falling prices and profits. The government, in fighting such a situation, resort to large scale
construction of public works such as railway, roads. dams, canals etc. to provide employment
opportunities to the unemployment.
Fighting against Contingencies: Contingencies are uncalled situation that need a lot of
money to fight against them. In such circumstances. public debt is only way out with the
government to meet the cost of such contingencies like floods, famines, drought, earthquakes
etc. Such situations need immediate solutions for which the public debt (government debt) is
the only answer because tax collection requires a tot of time.

Bad side of public debt (disadv)

Unproductive Loans: if loans are taken for unproductive purposes, they may be more
harmful to the country because their burden on the community will be much more because the
people do not get anything in return directly or indirectly. Excessive expenditure on war and
armaments are the examples of unproductive debt. Thus, it is advisable that government
should take proper care and adopt sufficient restraint while collecting loans for unproductive
purposes.
Public debts leads to Extravagance: Public debt is considered an easy money. It takes little
time and strain in borrowing money from the public. This easy money can be spent very
easily on any scheme requiring a huge sum without any due consideration for the probable
returns. Easy money gives incentive to extravaganza. If the money is spent so easily; it will
increase the burden of loan on the people but without any betterment of them.

It hampers the Economic Conditions: Repayment of debt is as urgent as taking of it.

The debt is to be redeemed on, its maturity t along with interest. The government resorts to
more and more taxes to collect money for the repayment of debt which reduces the ability of
the people to produce and to save more because it brings nothing to them If the government
fails to raise revenue from taxes, it adopts cheap monetary policies which may result in
instability in the financial condition of the nation.

National Wealth Flows out: If public debt has been acquired from external sources, it is to
be paid along with interest either in foreign exchange or in terms of goods and services, if it is
paid in cash, valuable foreign exchange will be flown out. If it is paid in terms of goods and
services, it will reduce the availability of these goods within the country and inflationary
pressures on the economy will mount. In both the cases, it implies an out flow of wealth to the
foreign countries. Sometimes, it happens that the government has to borrow afresh to repay
the old loans. This is again not good for the development and prosperity of the nation.