A Brief History

Originated in Ancient Egypt around 3000BC 2800 BC

Pharoah conducts a biennial tour of kingdom, collecting tax revenues from
people

"But when the crop comes in, give a fifth of it to Pharaoh. The other four-
fifths you may keep as seed for the fields and as food for yourselves and
your households and your children." - Genesis (chapter 47, verse 24)

Islamic rulers imposed jizya starting in the 11th century. Abolished by
Akbar later

Derived from Latin word taxare: to estimate

Not a voluntary donation but an enforced contribution imposed by the
government
Government Expenditures and revenue in France
over the 17th Century

Taxation levels
24.30 million livres in 1600-10
126.86 million livres in 1650-59
117.99 million livres in 1700-10
Govt debt had reached 1.6 billion
livres till this period
421.50 million livres in 1780-89

During the eighteenth and early
nineteenth century, tax rates in
Europe increased dramatically
as war became more expensive
and governments became more
centralized and adept at
gathering taxes.

Tax burden increased by 85%
over this period.

Taxation as a percentage of GDP in
2003

56.1% in Denmark
54.5% in France
49.0% in the Euro area
42.6% in the United Kingdom
35.7% in the United States
35.2% in The Republic of Ireland
OECD members an average of 40.7%.

OECD: Organization for Economic Co-operation and development


Few Govt Agencies for Tax Collection
Canada Canada Revenue Agency
The Internal Revenue Service (IRS) in the United States
Her Majesty's Revenue and Customs (HMRC) in the UK

Which country most Complicated Taxation
system in the world?
GERMANY
75 % of the world taxation literature refers to the
German system.
Purpose
What are funds provided by taxation used for?
Expenditures on war
Enforcement of law and public order
Protection of property and economic infrastructure
Public works
Social engineering
The operation of government itself
Fund welfare and public services such as education systems, health
care systems, pensions for the elderly, unemployment benefits, and
public transportation.
Energy, water and waste management systems are also common public
utilities.
Facts of Tax System


The resource collected from the public through taxation is always greater
than the amount which can be used by the government.

The difference is compliance cost which includes for example the labor
cost and other expenses incurred in complying with tax laws and rules.

Taxes or excises initially levied to fund some specific government
programs are then later diverted to the government general fund.
(Is this really the case in India??? )
If the tax collected on alcohol is paid directly for
alcoholism rehabilitation centers, what is such a
concept called?
Hypothecation:

Collection of a tax in order to spend it on a specified
purpose.


Often considered as a bad practice disliked by many finance
ministers because it reduces their freedom of action.
(Which freedom of which action??)
The four Rs of Tax
The below four Rs are four main purposes or effects of tax.

Revenue
Spending on roads, schools and hospitals.
Indirect Govt functions like market regulations.

Redistribution
Transfer of wealth from richer to poorer

Repricing
Taxes levied to address externalities
Ex: Tax on tobacco. Tax on carbon???

Representation
Very historical and very well established method of politics.
Representation by population
Tax Rate Calculation
Marginal Rate: Rate paid on the next rupee of income
earned
Effective Rate: Total tax paid / The total amount the tax is
paid on
Ex: Income tax slabs are 5% from $0 up to $50,000, 10%
from $50,000 to $100,000, and 15% over $100,000, a
taxpayer with income of $175,000 would pay a total of
$18,750 in taxes.
(0.05*50,000) + (0.10*50,000) + (0.15*75,000) = 18,750
The "effective rate" would be 10.7%:
(18,750/175,000 = 0.107)
The "marginal rate" would be 15%.
Proportional Tax:
Effective tax rate is fixed as the amount to which the rate is applied
increases.
Ex: Tax on Luxury Goods
Progressive Tax:
Effective tax rate increases as the amount to which the rate is
applied increases.
Ex: Income Tax
Regressive Tax:
Effective tax rate decreases as the amount to which the rate is
applied increases.
Ex: Property Tax in US, Television License Tax in Europe, Sin Taxes
Direct Tax and Indirect Tax

Direct Tax: Income Tax, Corporate Tax, Transfer Tax etc.
Indirect Tax: Sales Tax, VAT, Goods and Services Tax (GST).

Definitions are a little bit subtle.

According to US constitutional law, Property Tax is a direct Tax
and sale of property is indirect tax.

VAT is a direct tax under US constitutional Law
Kinds of Taxes
Ad valorem
Capital gains tax
Consumption tax
Corporation tax
Environment Affecting Tax
Excises
Income tax
Inheritance tax
Poll tax
Property tax
Retirement tax
Sales tax
Tariff Tax
Toll Tax
Transfer tax
Value Added Tax /
Goods and Services
Tax
Wealth (net worth) tax
Double Tax
Corporate Taxation
Ad Valorem


Tax base is the value of a good, service, or property.

Sales taxes, tariffs, property taxes, inheritance taxes, and
value added taxes

Imposed at the time of a transaction, may be imposed
annually.

Excise Tax - Base is quantity Ex: UK - Alcoholic drinks
Capital gains tax
Levied on profit

Time changes the value

Taxes in different countries:
US - Tax based upon the length of holding
Canada - 50% of gain is taxable
India -
Short Term (10% up to 1 year)
Long Term (Nil for stocks and MF)
20% on assets held 3 years or more

Consumption tax:
Tax on non-investment spending.
Ex: Sales Tax and Income Tax

Corporation tax:
Direct tax levied by various jurisdictions on the profits
made by companies
Often includes capital gains of a company
Environment Affecting Tax:
Natural resources consumption tax
Ex: Greenhouse gas tax (Carbon tax), "sulfuric tax Etc.
Purpose is to reduce the environmental impact by
Repricing.
Excises:
Based on the quantity, not the value, of product purchased.
Ex: In US, the Federal government imposes an excise tax
of 18.4 cents per U.S. gallon (4.86/L) of gasoline, while
state governments levy an additional 8 to 28 cents per U.S.
gallon.
Sin Taxes are often hypothecated.
Carbon Tax is Repriced Tax.

Income Tax:
"The inclusion of one is the exclusion of another. The
certain designation of one person is an absolute exclusion
of all others... This doctrine decrees that where law
expressly describes a particular situation to which it shall
apply, an irrefutable inference must be drawn that what is
omitted or excluded was intended to be omitted or
excluded." (Black's Law Dictionary, 6th edition.)
How does it relate to income Tax?
Inheritance tax:
These are taxes which arise on the death of an individual.
Only In United States tax law, there is a distinction
between an estate tax and an inheritance tax: the former
taxes the personal representatives of the deceased, while
the latter taxes the beneficiaries of the estate.
Poll tax or Per Capita Tax:
Levies a set amount of tax per individual.
It is an example of the concept of fixed tax.
Easy to compute and collect and difficult to cheat.
Very unpopular because poorer people pay a higher
proportion of their income than richer people.
The introduction of a poll tax in medieval England was the
primary cause of the 1381 Peasants' Revolt.
Scotland was the first to be used to test the new poll tax in
1989 with England and Wales in 1990.
This lead to the "Poll Tax Riots"
Property tax:
Tax imposed on property by reason of its ownership.
Property taxes are usually charged on a recurrent basis.
Ex: Annual charge on the ownership of real estate
Ex: Two most common type of property taxes are stamp
duty, charged upon change of ownership, and inheritance
tax, which is imposed in many countries on the estates of
the deceased.
Retirement Tax:
Some countries with social security systems, which provide
income to retired workers, fund those systems with specific
dedicated taxes.
Different from comprehensive income taxes
Total amount of the taxes paid is typically considered in the
calculation of the retirement benefits to which that worker
is entitled.
Ex: FICA, NIC
These taxes regressive in their immediate effect.
Sales Tax:
Sales taxes are levied when a commodity is sold to its final
consumer.

Tariff Tax:
Charge for the movement of goods through a political
border.
Tariffs discourage trade, to protect domestic industries.
A proportion of tariff revenues is hypothecated to pay
government to maintain a navy or border police.

Toll Tax:
Charged to travel via a road, bridge, tunnel, canal,
waterway or other transportation facilities.
Shunpiking is prevalent in US
Transfer Tax:
The charge for the stamp was either a fixed amount or a
percentage of the value of the transaction in contracts.
In most countries the stamp has been abolished but stamp
duty remains.
Taxes on currency transactions are known as Tobin taxes.

VAT/GST:
VAT and GST are one and the same.
Called as Single Business Tax and Turnover Tax in some
countries
This is mainly introduced to counter the evasion of the
sales tax.

Wealth Tax:
Tax is levied on the net worth exceeding a certain level
Double Taxation
Imposition of two or more taxes on same income.
Corporate Taxation in US is a double Tax

Double Tax is avoided by special Treaties

Capital Gains Tax: Capital Gains arising from the sale of
shares is taxable in the country of residence of the
shareholder and not in the country of residence of the
Company whose shares have been sold.

India has DTAT with 79 countries.

From which country does the highest number of
Investments come to India??


MAURITIUS

Reason: There is no capital gains tax in Maritius.