PUBLIC FINANCE








PUBLIC FINANCE 

This is an aspect of economics which relates to income and expenditure of the government. Every government has various project to execute and government has to derive means of generating income. 

BUDGET

Budget is a financial statement by the government showing revenue and proposed expenditure for the coming financial year.  A budget consist of packaging of proposals regarding revenue which is likely to be derived from various sources and expenditure which is likely to be met on various items

TYPES OF BUDGET

  1. DEFICIT BUDGET: A deficit budget means that governments planned revenue for the year is greater than the expenditure. 
  2. SURPLUS BUDGET: A surplus budget means that the planned government expenditure is less than the estimated government revenue. 
  3. BALANCE BUDGET: This is when the planned government expenditure is equal to the estimated government revenu
What is Fiscal policy?

Fiscal policy involves the use of government income and expenditure instruments to regulate the economy. Fiscal instruments are used as weapon of economic control full-stop fiscal policy is aimed at achieving certain objectives which are beneficial to the economy. It is used to remedy adverse conditions in the economy such as inflation, deflation, balance of payment deficit, a low level of productivity, economic recession, unemployment etc
  1. Types of fiscal policy?
    Discretionary fiscal policy: this is a deliberate fiscal approach or measures by the government in order to achieve some macro-economic objectives such as fighting inflation in the country but I'm working on surplus budgeting, increase in taxes and deduction in government expenditure. On the other hand,the government may want to reduce the unemployment level in the country and in that case focuses and tension on deficit budget.
    Non-discretionary fiscal policy: non discretionary fiscal policies and fiscal policies without any deliberate action on the part of the government to achieve any macro-economic objectives. Rather they are built-in features that help to stabilize the country without conscious actions and effort on the part of the players in the economy.
    WHAT ARE THE INSTRUMENTS OF FISCAL POLICY?
    Taxation
    Expenditure
    Borrowing
    National budget




    Objectives of public finance and fiscal policy
    • Efficient allocation of resources: the major aim of public finance is to ensure that resources are effectively and efficiently allocated among competing units. 
    • To improve the level of production: public finance can be used to stimulate the level of productivity by reducing tax, granting subsidise and increasing the size of the government investment in productive activities
    • Redistribution of income
    • to ensure efficient running of the economy through increase in revenue
    • To improve balance of payments position
    • To develop a proper fiscal policy
    • Provision of full employment.




SOURCES OF GOVERNMENT REVENUE 

1. Taxation: This is the major source of government revenue. Taxation can be divided into direct and indirect tax.

  • Direct tax: These are tax levied directly on the income or properties of individuals or organisation. Examples are company tax, personal income tax, capital gain tax.  
  • Indirect tax: These are tax levied on goods and services e.g. sales tax, excise duties, import and export duty. 

2. Fees, fines, charges and licenses: These are visa fees, passport fees, court fees, vehicle license, Hospital fees, and school registration fees.

3. Grant and Aids: Grants and Aids can be received from foreign countries or international financial institutions e.g. International Monetary Fund, World Bank. These are used purposely to finance projects

4. Loans: Government can borrow internally or externally to finance project. e.g. Loans club, IMF and World Bank.

5. Royalties and rent: Revenue can be generated from rent and royalties. Royalties are paid by Mining Sector and rent from government properties.          6. Interest , dividend and profit from government direct investment: Profit of public corporation is a major source of revenue for the government e.g. 

Dividend from investment 

7. Other sources are:

  1.  Rates
  2. Levied
  3. Penalties 
  4. Disposal of assets
  5. Donations 
  6. Personal savings
  7. Sale of assets
  8. Equiting financing i.e public sale of shares.
  9. Equipment leasing: Later date funds realized from leasing equipment to firms may be used for business expansion.
  10. Plough back profit
  11. Purchase of goods on credit


TAXATION
A tax is a form of money levied by the government or its agents on individual firm as well as on goods and services.
Tax is a compulsory contribution imposed by a government authority on goods, individuals, corporate bodies, etc.

PRINCIPLES OF TAXATION
These principles were propounded by Adam Smith
1. Equity: This is when tax is levied according to one's ability to pay
2. Certainty: The tax payer should be sure of the exact amount to be paid
3. Convenience: Pay-as-you-earn is the most convenient method of tax system will stop you pay as you collect your salary.
4. Economy: The amount spent in the cause of collecting taxes should be smaller than the amount collected
5. Flexibility: It can change with time
6. Simplicity: It should be simple enough for everybody
7. Evasion: It should be what people cannot easily evade or avoid
8. Productivity
9. Impartiality
10. Fiscal instruments

TYPES OF TAX
1. Direct Tax: These are taxes on different kinds of income (except death duties) levied directly on the person or company receiving the income. E.g personal income tax, capital gains tax, death duties, royalties and mining rents, stamps duties and motor vehicle duties

EXAMPLES
  •  Personal income tax: This is a tax on an individual’s income. E.g pay-as-you-earn. In this case, income and taxed progressively
  • Corporation or company tax: This is a tax on the profits of companies, usually allowance is made for capital expenditure before calculating profit
  • Capital gain tax: This is a tax the properties of deceased persons, such a tax cannot be levied on land in West Africa because of the difficulty involved in identifying ownership of land
  • Royalties and mining rent, stamp and motor vehicle duties: Royalties and mining rents contributed largely to government revenue in Nigeria.
ADVANTAGES OF DIRECT TAX

  • More equitable: The system of tax d Pay-as-you-earn (P.A.Y.E) for example the progressive tax system made direct taxes more equitable than indirect taxes since the rich are taxed at a higher rate than the poor
  • Redistribute income better: Since more tax is levied on the rich than on the poor the gap between the rich and the poor is made closer
  •  Tax yield is more certain and easier
  • Direct taxes give the pair freedom to spend his disposable income (i.e. income after tax) as he wishes
  • Direct taxes are anti-inflationary i.e. it can be used to combat inflation in the economy. The purpose is to check people spending through reduction in their disposable income

DISADVANTAGES OF DIRECT TAX

  • It could act as these incentives to add work if the rate of taxation is high
  •  It discourages saving: If a higher percentage of income is removed from the people in the form of higher taxes, they would have less money to save after meeting their basic requirements
  • Direct taxes are prone to tax evasion i.e. people make false declaration of income in order to pay less tax
  •  High company taxes could discourage investment
2. Indirect tax: Indirect taxes are levied on goods and services. Examples are custom duties(export duties and import duties), excise duties, sales tax and purchase tax

EXAMPLES OF INDIRECT TAX

  •  Custom duties: These are taxes levied on goods brought into the country (i.e. import duties) and those goods sent to the country (i.e. export duties)
  •  Excise duties: It is levied on home or locally produced goods. Little revenue is generated from this
  •  Sales tax: It is a tax levied and collected either at a wholesale or retail level. E.g. taxes on the sale of petrol
  • Purchase tax: This is a tax levied based on the value of the commodity E.g. consumer goods like cosmetics, television sets, clothing and furniture at varying rates
  • Licence: The use of radio and television set and sales of drinks at truck taxes in the form of licence which are to be obtained
ADVANTAGES OF INDIRECT TAX

  •  Indirect taxes can be used to correct an adverse balance of payment through increase in price of imported goods
  • Indirect taxes could be used to check the importation of harmful and non-essential items
  •  Indirect taxes do not discourage hard work i.e. workers can work overtime to get more income to purchase commodities whose price has increased
  •  Indirect taxes cannot be evaded i.e. it is easy to collect from buyers
  •  They could be used to protect infant industry and help prevent competition with locally produced goods
  •  The burden of tax is relatively small when spread over many purchases
  •  It forms an important part of government revenue
DISADVANTAGES OF INDIRECT TAX

  •  They are usually regressive i.e. both rich and the poor pay the same amount of indirect tax
  •  It is expensive to collect i.e. it is not economical. Resources are spent in trying to combat smuggling
  •  Indirect taxes may generate inflationary trends with the economy
  •  Indirect taxes have uncertain revenue yields i.e. they are therefore not reliable source of revenue
  •  Export duties which is an indirect tax, discriminate 
  • against certain section of the community

OBJECTIVES OF PUBLIC FINANCE

1. To generate revenue and to achieve an effective and efficient source of revenue.
2. To ensure and improve balance of payment
3. To ensure the stability of price of goods and services in order to prevent frequent fluctuation and inflation
4. To determine the need of the people and how to meet such needs
5. To provide employment opportunities in the country
6. To ensure that a good and acceptable fiscal policy is attained

COMPONENTS OF GOVERNMENT EXPENDITURE

1. Administration; including law and order to carry out their primary function of the government
2. Defence
3. Increased public debt
4. Inflation


TAX SYSTEM

This relates to how tax is being rated in terms of payment. Taxes are classified as progressive, proportional or progressive according to the percentage of income they take as income falls. Tax System are as follows:
  1. Progressive tax system
  2. Proportional tax system
  3. Regressive tax system

PROGRESSIVE TAX SYSTEM
This is a system of tax which takes more from high income earners than low income earners. Here a taxpayer with a higher income pay more than a payer with lower income. The percentage rate increases as income increases. E.g personal income tax.

ADVANTAGES OF PROGRESSIVE TAX SYSTEM

  1. It is based on ability to pay
  2.  It is productive
  3.  It is equitable
  4. It is economical

DISADVANTAGES OF PROGRESSIVE TAX SYSTEM

  1. Tax evasions
  2. It is not justified
  3. It discourages capital formation
  4. It is arbitrary
  5. It is dis-incentive to work

PROPORTIONAL TAX SYSTEM

This is a tax regime in which the same rate is charged to every taxpayer irrespective of the level of income. The rate is the same regardless of the level of income. Under proportional tax, even though the same rate is charged the burden of tax is upon the low income earners.

ADVANTAGES OF PROPORTIONAL TAX SYSTEM

  1.  It is very simple
  2.  It is easy to calculate
  3.  It does not affect the pattern of income distribution

DISADVANTAGES OF PROPORTIONAL TAX SYSTEM

  1.  Inequalities
  2.  It is less productive
  3.  It affect the economy

REGRESSIVE TAX SYSTEM

This is a tax system in which the tax rate decreases as the income increases. Regressive tax regime takes a lower percentage of income as income increases i.e. a higher income earner pays less tax than low income persons in proportion to his income. E.g sales tax

ADVANTAGES OF REGRESSIVE TAX SYSTEM
  •  It is easy to collect
  •  It is not a dis-incentive to saving and Investment

DISADVANTAGES OF REGRESSIVE TAX SYSTEM

  1.  It takes more from low income
  2.  The body is felt by low income earners
  3.  It aggravates income inequality

REASONS FOR TAXATION

  1.  To generate Revenue
  2.  To discourage consumption pattern of certain goods
  3.  To redistribute income in the economy
  4.  To maintain a high level of employment
  5.  To protect infant Industries
  6.  To correct balance of payment deficit
  7.  To control inflation
  8.  To stabilize the economy.

TAX ANALYSIS

Element of tax

1. Tax base
2. Tax rate

TAX BASE

This is the item or object on which tax is levied. It is a set of income on which tax is imposed. Examples are: Personal Income, Corporation Income, etc.

TAX RATE

This is the rate of tax to be paid on tax base or object. E.g 15% may be levied on #200,000 worth of income, #30,000 will be paid as tax. It can be expressed as:

Tax rate = Tax payment/ Tax base × 100

INCIDENCE OF TAXATION
This refers to how the real burden of a tax is distributed among persons in a country. The incidence of tax fall on the person who finally pays the tax. The initial effect of the tax on the object is called FORMAL INCIDENCE. E.g tax payers bears the initial burden of a tax while EFFECTIVE INCIDENCE refers to who bears the final burden of the tax. The following are the case of who bears the final burden of tax.
i. Incidence of tax when demand is perfectly inelastic.
ii. Incidence of tax when demand is perfectly elastic
iii. Incidence of tax when demand is fairly elastic
iv. Incidence of tax when demand is fairly elastic
v. Incidence of tax when demand is unitary
NOTE:
1. When direct tax is involved, the workers who pay bear the burden.
2. When indirect tax is involved, the producer and consumer shares the burden.
3. When the demand is perfectly inelastic, the burden of tax is shifted in form of high price of goods .
4. When demand is perfectly elastic

REVENUE ALLOCATION

This is the distribution of the National Income among the various region or state making up the country. It can also be defined as a method of sharing collected revenue among the three tiers of government; Federal, State and Local government

PRINCIPLES OF REVENUE ALLOCATION

Generally revenue allocation is based on some factors e.g size, level of development and the contribution of National Income. The principles are as follows:
1. Equality of states
2. Derivation principles
3. Population
4. Special fund
5. National Interest

PROBLEMS OF REVENUE ALLOCATION

1. Over population
2. Injustice
3. Unrealistic population data
4. Over concentration of fund at the centre
5. Diversion of funds meant for the local government by the state government

NATIONAL DEBT

This is the total amount of money which a federal government borrowed from both within and outside the country in a given period. National Debt is also referred to as Public Debt. National Debt refers to the only debt owned by the federal government while Public Debt refers to the debt of the whole country.

TYPES OF NATIONAL DEBT

1. Internal Debt: This refers to the total amount of money which government borrowed from people and firm within the country.
2. External Debt: This refers to the total amount of money which a government owes to foreign countries, global organisations like International Monetary Fund (IMF), Workd bank and other rich nations.

REASONS FOR BORROWING

1. To eliminate previous debts
2. To stimulate the economy
3. To prosecute war
4. To eliminate balance of payment Deficit
5. To meet emergency needs
6. To finance budget deficit

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