SS2 ECONS LESSON 4

PUBLIC FINANCE

Public finance is an aspect of Economics which deals with government revenue and expenditure.

An economy is the state of a country in terms of the production and consumption of goods and services and the supply of money.

Government intervenes in an economy basically through:

1.     Fiscal policy(Public Finance)

2.     Monetary policy(Banking system, Central Bank and Specialized Institutions)

3.     Direct control

(This topic is only focusing on fiscal policy)

FISCAL POLICY

This is government’s deliberate attempt to use tax and expenditure to control economic activities.

Objectives of Fiscal Policy

1.     To achieve full employment

2.     General price stability

3.     Optimal growth rate.

4.     Income re-distribution.

5.     Effective and efficient allocation of resources.

GOVERNMENT REVENUE

This refers to the total cash receipts of government from all sources over a period of time.

It can be from tax sources ex. Direct tax, excise duties etc. or non-tax sources ex. Sale of public asset, grants and aids etc

INSTRUMENTS OF FISCAL POLICY

1.     Taxation

2.     Expenditure

3.     Borrowing

4.     National budget

1.     TAXATION

This involves the compulsory assessment, imposition, payment, collection of taxes, accounting and auditing of tax records.

TAX:  This is a compulsory contribution imposed on individuals, goods, services, corporate body etc. by the government, not as penalty for an offence, but to generate revenue for the government which in turn must ensure security and public welfare.

SYSTEMS OF TAX

1.     Proportional Tax:

This is a tax system whereby tax-payers are charged equal rates irrespective of their income level.

2.     Progressive System:

This is a system whereby tax-payers are charged according to their income level. Increase in income increases tax rate.

3.     Regressive System:

This system charges low rates to high income earners and high rates to low income earners.

PRINCIPLES OF TAXATION

1.     Equality:

All tax payers should be taxed equal amount proportional to their income.

2.     Economy:

Wastage should be avoided in collecting tax.

3.     Convenience:

Tax should be collected at a time payers receive their income.

4.     Certainty:

Tax object not be estimated or guessed. It should be assessed for certainty.

5.     Neutrality:

Tax should not undermine merits in economic decisions.

REASONS WHY NIGERIANS ARE TAXED

To generate money for:

1.     General administration of government.

2.     Defense

3.     Maintenance of law and order

4.     Provision of social amenities

5.     To ensure equitable redistribution of income.

DIFFICULTIES ENCOUNTERED BY TAX COLLECTORS IN NIGERIA

1.     Tax evasion: when many citizens avoid paying tax.

2.     Improper record keeping

3.     Ignorance on the importance of paying tax

4.     Mismanagement of public funds.

5.     False declaration of income.

TYPES OF TAX

1.     Direct tax:

These are taxes paid directly by individuals to the government with personal income or wealth being the object.

2.     Indirect Taxes:

These are taxes imposed on goods and services and are paid as these products are bought.

Advantages of Direct Tax

1.     They are more equitable

2.     Leads to more equitable income redistribution.

3.     They are easy to collect. Ex. PAYE

Advantages of Indirect Tax

1.     It yields more revenue to the government

2.     It is used to discourage the consumption of harmful goods.

3.     Used to prevent dumping

4.     It has a wider coverage than direct tax.

5.     It is not easy to evade since consumers pay a they purchase goods and services.

Specific Tax

These are taxes levied at fixed rate per unit of output.