Public

Services
Taxes

Government

People

The government provides benefit to the people in the form of public services and
the people provide the funds that finance the government. This mutuality of support
between the people and the government is referred to as the basis of taxation

Theories of Cost Allocation

Taxation is a mode of allocating government costs or burden to the people. In
distributing the costs or burden, the government regards the following general
considerations in the exercise of its taxation power:
1. Benefit received theory
The more benefit one receives from the government, the more taxes he
should pay.
2. Ability to pay theory
The ability to pay theory presupposes that taxation should also consider the
taxpayers ability to pay. Taxpayers should be required to contribute based on
their relative capacity to sacrifice for the support of the government
Purposes of Taxation
1. Raise More Revenue
The fundamental objective of taxation is to finance government expenditure.
The government requires carrying out various development and welfare
activities in the country. For this, it needs a huge amount of funds. The
government collects funds by imposing taxes. So, raising more and more
revenues has been an important objective of tax.

2. Prevent Concentration Of Wealth In A Few Hands

Tax is imposed on persons according to their income level. High earners are
imposed on high tax through progressive tax system. This prevents wealth
being concentrated in a few hands of the rich. So, narrowing the gap between
rich and poor is another objective of tax.
3. Redistribute Wealth For Common Good
Tax collected by the government is expended for carrying out various welfare
activities. In this way, the wealth of the rich is redistributed to the whole
community.
4. Boost Up The Economy
Tax serves as an instrument for promoting economic growth, stability and
efficiency. The government controls or expands the economic activities of the
country by providing various concessions, rebates and other facilities. The
effective tax system can boost up the economy. Similarly, taxes can correct
for externalities and other forms of market failure (such as monopoly). Import
taxes may control imports and therefore help the country's
international balance of payments and protect industries from overseas
competition.
5. Reduce Unemployment
The government can reduce the unemployment problem in the country by
promoting various employment generating activities. Industries established
in remote parts or industries providing more employment are given more
facilities. As a result, the unemployment problem can be reduced to a great
extent through liberal tax policy.
6. Remove Regional Disparities
Regional disparity has been a chronic problem to the developing countries.
Tax is one of the ways through which regional disparities can be minimized.
The government provides tax exemptions or concessions for industries
established or activities carried out in backward areas. This will help increase
economic activities in those areas and ultimately regional disparity reduces to
minimum.
Characteristics of a sound tax system
Fiscal Adequacy- The sources (proceeds) of tax revenue should coincide
with and approximate needs of government expenditures. The sources of
revenue should be sufficient and elastic to meet the demands of public
expenditures;
Theoretical Justice- The tax system should be fair to the average taxpayer
and based upon his ability to pay.
Administrative Feasibility- The tax system should be capable of being
properly and efficiently administered by the government and enforced with
the least inconvenience to the taxpayer.

Sources:
http://accountlearning.blogspot.com/2012/01/objectives-of-tax.html
http://www.justhomeworks.com/2013/07/basic-principles-of-sound-tax-system.html
Income taxation: Laws, Principles and Applications by Rex B. Banggawan, CPA,
MBA

Classification of Taxes
Classification of taxes

1. As to subject matter or object

A. personal, poll or capitation- tax of a fixed amount on individuals residing within a

specified territory, without regard to their property, occupation or business. Ex.
Community tax (basic)

B. property- imposed on property, real or personal, in proportion to its value, or in

accordance with some reasonable method or apportionment. Ex. Real estate Tax

C. Excise- imposed upon the performance of an act, the enjoyment of a privilege, or

the engaging in an occupation, profession or business. Ex. Income tax, VAT, Estate
Tax, Donors Tax

2. As to who bears the burden of the tax

a. Direct- the tax is imposed on the person who also bears the burden thereof
Ex. Income tax, community tax, estate tax

b. Indirect imposed on the taxpayer who shifts the burden of the tax to another,
Ex. VAT, customs duties.

3. As to determination of amount

a. specific imposed and based on a physical unit of measurement as by head

number, weight, length or volume. Ex. Tax on distilled spirits, fermented liquors,
cigars

b. Ad Valorem of a fixed proportion of the value of the property with respect to

which the tax is assessed. Ex. Real estate tax, excise tax on cars, non essential
goods.

4. As to purpose

A. general, fiscal, or revenue- imposed for the general purpose of supporting the
government. Ex. Income tax, percentage tax

B. special or regulatory- imposed for a special purpose, to achieve some social or

economic objective. Ex. Protective tariffs or custom duties on imported goods
intended to protect local industries.

5. As to scope or authority imposing the tax

a. national- imposed by the national government ex. NIRC, custom duties

b. municipal or local- imposed by municipal corporations or local governments ex.
Real estate tax,

6. As to graduation of rates.

a. proportional- based on a fixed percentage of the amount of the property, receipts

or on other basis to be taxed ex. Real estate tax, VAT

b. progressive and graduated- the rate of the tax increases as the tax base or
bracket increases ex. Income tax, estate tax, donors tax
c. regressive- the rate of tax decreases as the tax base or bracket increases.
d. degressive- increase of rate is not proportionate to the increase of tax base.