Finance

Public finance

Public finance is a field of economics concerned with paying for collective or governmental activities, and with the administration and design of those activities. The field is often divided into questions of what the government or collective organizations should do or are doing, and questions of how to pay for those activities. The broader term, public economics, and the narrower term, government finance, are also often used.

The proper role of government provides a starting point for the analysis of public finance. In theory, private markets will allocate goods and services among individuals efficiently (in the sense that no waste occurs and that individual tastes are matching with the economy's productive abilities). If private markets were able to provide efficient outcomes and if the distribution of income were socially acceptable, then there would be little or no scope for government. In many cases, however, conditions for private market efficiency are violated. For example, if many people can enjoy the same good at the same time (non-rival, non-excludable consumption), then private markets may supply too little of that good. National defense is one example of non-rival consumption, or of a public good.

In economics, a public good is a good that is non-rivalrous and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability that no one can be effectively excluded from using the good. In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.

For example, if one individual visits a doctor there is one less doctor's visit for everyone else, and it is possible to exclude others from visiting the doctor. This makes doctor visits a rivaled and excludable private good. Conversely, breathing air does not significantly reduce the amount of air available to others, and people cannot be effectively excluded from using the air. This makes air a public good, albeit one that is economically trivial, since air is a free good. A less straight-forward example is the exchange of MP3 music files on the internet: the use of these files by any one person does not restrict the use by anyone else and there is little effective control over the exchange of these music files and photo files.

Non-rivalness and non-excludability may cause problems for the production of such goods. Specifically, some economists, have argued that they may lead to instances of market failure, where uncoordinated markets driven by parties working in their own self interest are unable to provide these goods in desired quantities. These issues are known as public goods problems, and there is a good deal of debate and literature on how to measure their significance to an economy, and to identify the best remedies. These debates can become important to political arguments about the role of markets in the economy. More technically, public goods problems are related to the broader issue of externalities.

Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good . This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally.

Excludable	Non-excludable
Rivalries	Private goods food, clothing, toys, furniture, cars	Common goods (Common-pool resources) fish, hunting game, water, arterial roads
Non-rivalries	Club goods satellite television	Public goods national defense, free-to-air television, air

Paul A. Samuelson is usually credited as the first economist to develop the theory of public goods. In his classic 1954 paper The Pure Theory of Public Expenditure,. he defined a public good, or as he called it in the paper a "collective consumption good", as follows:

...[goods] which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good...

This is the property that has become known as Non-rivalry. In addition a pure public good exhibits a second property called Non-excludability: that is, it is impossible to exclude any individuals from consuming the good.

In economics, a market failure occurs when there is an inefficient allocation of goods and services in a market. That is, there exists another outcome where market participants' overall gains from the new outcome outweigh their losses (even if some participants lose under the new arrangement). Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick.

According to mainstream economic analysis, a market failure (relative to Pareto efficiency) can occur for three main reasons.

 First, agents in a market can gain market power, allowing them to block other mutually beneficial gains from trades from occurring. This can lead to inefficiency due to imperfect competition, which can take many different forms, such as monopolies, monopsonies, cartels, or monopolistic competition, if the agent does not implement perfect price discrimination. In a monopoly, the market equilibrium will no longer be Pareto optimal The monopoly will use its market power to restrict output below the quantity at which the Marginal social benefit (MSB) is equal to the Marginal social cost (MSC) of the last unit produced, so as to keep prices and profits high An issue for this analysis is whether a situation of market power or monopoly is likely to persist if unaddressed by policy, or whether competitive or technological change will undermine it over time.

• Second, the actions of agents can have externalities, which are innate to the methods of production, or other conditions important to the market. For example, when a firm is producing steel, it absorbs labor, capital and other inputs, it must pay for these in the appropriate markets, and these costs will be reflected in the market price for steel. If the firm also pollutes the atmosphere when it makes steel, however, and if it is not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society Hence, the market price for steel will fail to incorporate the full opportunity cost to society of producing. In this case, the market equilibrium in the steel industry will not be optimal More steel will be produced than would occur were the firm to have to pay for all of its costs of production. Consequently, the MSC of the last unit produced will exceed its MSB
• Finally, some markets can fail due to the nature of certain goods, or the nature of their exchange. For instance, goods can display the attributes of public goods.or common-pool resources, while markets may have significant transaction costs, agency problems, or informational asymmetry. In general, all of these situations can produce inefficiency, and a resulting market failure. A related issue can be the inability of a seller to exclude non-buyers from using a product anyway, as in the development of inventions that may spread freely once revealed. This can cause underinvestment, such as where a researcher cannot capture enough of the benefits from success to make the research effort worthwhile

Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems (Diamond-Mirlees separation). In this view, public sector programs should be designed to maximize social benefits minus costs (cost-benefit analysis), and then revenues needed to pay for those expenditures should be raised through a taxation system that creates the fewest efficiency losses caused by distortion of economic activity as possible. In practice, government budgeting or public budgeting is substantially more complicated and often results in inefficient practices.

Government can pay for spending by borrowing (for example, with government bonds), although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues. The accumulation of deficits over time is the total public debt. Deficit finance allows governments to smooth tax burdens over time, and gives governments an important fiscal policy tool. Deficits can also narrow the options of successor governments.

Public finance is closely connected to issues of income distribution and social equity. Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently.

The "Public Choice" approach to public finance seeks to explain how self-interested voters, politicians, and bureaucrats actually operate, rather than how they should operate.

Public sector

The public sector, sometimes referred to as the state sector is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.

Examples of public sector activity range from delivering social security, administering urban planning and organizing national defenses.

The organization of the public sector (public ownership) can take several forms, including:

• Direct administration funded through taxation; the delivering organization generally has no specific requirement to meet commercial success criteria, and production decisions are determined by government.
• Publicly owned corporations (in some contexts, especially manufacturing, "state-owned enterprises"); which differ from direct administration in that they have greater commercial freedoms and are expected to operate according to commercial criteria, and production decisions are not generally taken by government (although goals may be set for them by government).
• Partial outsourcing (of the scale many businesses do, e.g. for IT services), is considered a public sector model.

A borderline form is

• Complete outsourcing or contracting out, with a privately owned corporation delivering the entire service on behalf of government. This may be considered a mixture of private sector operations with public ownership of assets, although in some forms the private sector's control and/or risk is so great that the service may no longer be considered part of the public sector. (See the United Kingdom's Private Finance Initiative.)

In spite of their name, public companies are not part of the public sector; they are a particular kind of private sector company that can offer their shares for sale to the general public.

Role of the Public Sector

The role and scope of the public sector and state sector are often the biggest distinction regarding the economic positions of socialists, liberals and libertarian political philosophy. In general, socialists favor a large state sector consisting of state projects and enterprises, at least in the commanding heights or fundamental sectors of the economy (although some socialists favor a large cooperative sector instead). Social democrats tend to favor a medium-sized public sector that is limited to the provision of universal programs and public services. Economic libertarians and minarchists favor a small public sector with the state being relegated to protecting property rights, creating and enforcing laws and settling disputes, a "night watchman state". Anarchists favor no public sector at all, with these powers enforced by voluntary associations or private organizations which are hired to provide these services

The government's deficit can be measured with or without including the interest it pays on its debt. The primary deficit is defined as the difference between current government spending and total current revenue from all types of taxes. The total deficit (which is often just called the 'deficit') is spending, plus interest payments on the debt, minus tax revenues. Therefore, if _t is a timeframe, G_t is government spending and T_t is tax revenue for the respective timeframe, then

Primary deficit = G_t − T_t

If D_{t − 1} is last year's debt, and r is the interest rate, then

Total deficit = G_t + rD_{t − 1} − T_t

Finally, this year's debt can be calculated from last year's debt and this year's total deficit:

D_t = (1 + r)D_{t − 1} + G_t − T_t

Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances.

Inflation reduces the real value of accumulated debt. If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive

Cost-benefit analysis

Cost-benefit analysis is a term that refers both to:

• helping to appraise, or assess, the case for a project or proposal, which itself is a process known as project appraisal; and
• an informal approach to making economic decisions of any kind.

Under both definitions the process involves, whether explicitly or implicitly, weighing the total expected costs against the total expected benefits of one or more actions in order to choose the best or most profitable option. The formal process is often referred to as either CBA (Cost-Benefit Analysis) or BCA (Benefit-Cost Analysis).

Benefits and costs are often expressed in money terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their “present value.” Closely related, but slightly different, formal techniques include cost-effectiveness analysis, economic impact analysis, fiscal impact analysis and Social Return on Investment (SROI) analysis. The latter builds upon the logic of cost-benefit analysis, but differs in that it is explicitly designed to inform the practical decision-making of enterprise managers and investors focused on optimising their social and environmental impacts.

Theory

Cost–benefit analysis is typically used by governments to evaluate the desirability of a given intervention. It is heavily used in today's government. It is an analysis of the cost effectiveness of different alternatives in order to see whether the benefits outweigh the costs. The aim is to gauge the efficiency of the intervention relative to the status quo. The costs and benefits of the impacts of an intervention are evaluated in terms of the public's willingness to pay for them (benefits) or willingness to pay to avoid them (costs). Inputs are typically measured in terms of opportunity costs - the value in their best alternative use. The guiding principle is to list all parties affected by an intervention and place a monetary value of the effect it has on their welfare as it would be valued by them.

The process involves monetary value of initial and ongoing expenses vs. expected return. Constructing plausible measures of the costs and benefits of specific actions is often very difficult. In practice, analysts try to estimate costs and benefits either by using survey methods or by drawing inferences from market behavior. For example, a product manager may compare manufacturing and marketing expenses with projected sales for a proposed product and decide to produce it only if he expects the revenues to eventually recoup the costs. Cost–benefit analysis attempts to put all relevant costs and benefits on a common temporal footing. A discount rate is chosen, which is then used to compute all relevant future costs and benefits in present-value terms. Most commonly, the discount rate used for present-value calculations is an interest rate taken from financial markets (R.H. Frank 2000). This can be very controversial; for example, a high discount rate implies a very low value on the welfare of future generations, which may have a huge impact on the desirability of interventions to help the environment. Empirical studies suggest that in reality, people's discount rates do decline over time. Because cost–benefit analysis aims to measure the public's true willingness to pay, this feature is typically built into studies.

During cost–benefit analysis, monetary values may also be assigned to less tangible effects such as the various risks that could contribute to partial or total project failure, such as loss of reputation, market penetration, or long-term enterprise strategy alignments. This is especially true when governments use the technique, for instance to decide whether to introduce business regulation, build a new road, or offer a new drug through the state healthcare system. In this case, a value must be put on human life or the environment, often causing great controversy. For example, the cost–benefit principle says that we should install a guardrail on a dangerous stretch of mountain road if the dollar cost of doing so is less than the implicit dollar value of the injuries, deaths, and property damage thus prevented (R.H. Frank 2000).

Cost–benefit calculations typically involve using time value of money formulas. This is usually done by converting the future expected streams of costs and benefits into a present value amount.

Application and history

Cost–benefit analysis is used mainly to assess the monetary value of very large private and public sector projects. This is because such projects tend to include costs and benefits that are less amenable to being expressed in financial or monetary terms (e.g., environmental damage), as well as those that can be expressed in monetary terms. Private sector organizations tend to make much more use of other project appraisal techniques, such as rate of return, where feasible.

The practice of cost–benefit analysis differs between countries and between sectors (e.g., transport, health) within countries. Some of the main differences include the types of impacts that are included as costs and benefits within appraisals, the extent to which impacts are expressed in monetary terms, and differences in the discount rate between countries. Agencies across the world rely on a basic set of key cost–benefit indicators, including the following:

• NPV (net present value)
• PVB (present value of benefits)
• PVC (present value of costs)
• BCR (benefit cost ratio = PVB / PVC)
• Net benefit (= PVB - PVC)
• NPV/k (where k is the level of funds available)

The concept of CBA dates back to an 1848 article by Dupuit and was formalized in subsequent works by Alfred Marshall. The practical application of CBA was initiated in the US by the Corps of Engineers, after the Federal Navigation Act of 1936 effectively required cost–benefit analysis for proposed federal waterway infrastructurex. The Flood Control Act of 1939 was instrumental in establishing CBA as federal policy. It specified the standard that "the benefits to whomever they accrue [be] in excess of the estimated costs

Subsequently, cost–benefit techniques were applied to the development of highway and motorway investments in the US and UK in the 1950s and 1960s. An early and often-quoted, more developed application of the technique was made to London Underground's Victoria Line. Over the last 40 years, cost–benefit techniques have gradually developed to the extent that substantial guidance now exists on how transport projects should be appraised in many countries around the world.

In the UK, the New Approach to Appraisal (NATA) was introduced by the then Department for Transport, Environment and the Regions. This brought together cost–benefit results with those from detailed environmental impact assessments and presented them in a balanced way. NATA was first applied to national road schemes in the 1998 Roads Review but subsequently rolled out to all modes of transport. It is now a cornerstone of transport appraisal in the UK and is maintained and developed by the Department for Transport.

The EU's 'Developing Harmonised European Approaches for Transport Costing and Project Assessment' (HEATCO) project, part of its Sixth Framework Programme, has reviewed transport appraisal guidance across EU member states and found that significant differences exist between countries. HEATCO's aim is to develop guidelines to harmonise transport appraisal practice across the EU.

 Transport Canada has also promoted the use of CBA for major transport investments since the issuance of its Guidebook in 1994More rec.

ent guidance has been provided by the United States Department of Transportation and several state transportation departments, with discussion of available software tools for application of CBA in transportation, including HERS, BCA.Net, StatBenCost, CalBC, and TREDIS. Available guides are provided by the Federal Highway AdministrationFederal Aviation Administration Minnesota Department of Transportation, and California Department of Transportation (Caltrans)

In the early 1960s, CBA was also extended to assessment of the relative benefits and costs of healthcare and education in works by Burton Weisbrod. Later, the United States Department of Health and Human Services issued its CBA Guidebook.

Accuracy problems

The accuracy of the outcome of a cost–benefit analysis depends on how accurately costs and benefits have been estimated..

These outcomes (almost always tending to underestimation unless significant new approaches are overlooked) are to be expected because such estimates:

1. Rely heavily on past like projects (often differing markedly in function or size and certainly in the skill levels of the team members)
2. Rely heavily on the project's members to identify (remember from their collective past experiences) the significant cost drivers
3. Rely on very crude heuristics to estimate the money cost of the intangible elements
4. Are unable to completely dispel the usually unconscious biases of the team members (who often have a vested interest in a decision to go ahead) and the natural psychological tendency to "think positive" (whatever that involves)

Another challenge to cost–benefit analysis comes from determining which costs should be included in an analysis (the significant cost drivers). This is often controversial because organizations or interest groups may think that some costs should be included or excluded from a study.

In the case of the Ford Pinto (where, because of design flaws, the Pinto was liable to burst into flames in a rear-impact collision), the Ford company's decision was not to issue a recall. Ford's cost–benefit analysis had estimated that based on the number of cars in use and the probable accident rate, deaths due to the design flaw would run about $49.5 million (the amount Ford would pay out of court to settle wrongful death lawsuits). This was estimated to be less than the cost of issuing a recall ($137.5 million. In the event, Ford overlooked (or considered insignificant) the costs of the negative publicity so engendered, which turned out to be quite significant (because it led to the recall anyway and to measurable losses in sales).

In the field of health economics, some analysts think cost–benefit analysis can be an inadequate measure because willingness-to-pay methods of determining the value of human life can be subject to bias according to income inequity. They support use of variants such as cost-utility analysis and quality-adjusted life year to analyze the effects of health policies

Public budgeting

Public Budgeting is a field of Public Administration and a discipline in the academic study thereof. Budgeting is characterized by its approaches, functions, formation, and type.

The authors Robert W. Smith and Thomas D. Lynch describe public budgeting through four perspectives. The politician sees the budget process as "a political event conducted in the political arena for political advantage. The economist views budgeting as a matter of allocating resources in terms of opportunity cost where allocating resources to one consumer takes resources away from another consumer. The role of the economist, therefore, is to provide decision makers with the best possible information. The accountant perspective focuses on the accountability value in budgeting which analyzes the amount budgeted to the actual expenditures thereby describing the "wisdom of the original policy. Smith and Lynch's public manager's perspective on a budget is a policy tool to describe the implementation of public policy. Further, they develop an operational definition:

A "budget" is a plan for the accomplishment of programs related to objectives and goals within a definite time period, including an estimate of resources required, together with an estimate of resources available, usually compared with one or more past periods and showing future requirements

Leading Definitions

• Practical: "A plan for financing an enterprise or government during a definite period, which is prepared and submitted by a responsible executive to a representative body (or other duly constituted agent) whose approval and authorization are necessary before the plan may be executed." ~Frederick A. Cleveland
• Theoretical: The leading question: "On what basis shall it be decided to allocate x dollars to activity A instead of activity B?" ~V. O. Key Jr

1. Strategic Planning; deciding on the goals and objectives of an organization.
2. Management Control; management's process of assuring effective and efficient accomplishment of goals and objectives laid out via strategic planning.
3. Operational Control; focused on proper execution of specific tasks that provide the most efficient and effective means of meeting the goals and objectives ordered by management control.

Approaches to Budgeting

A brief note on Systems Theory applied to Political Science: Inputs enter the governmental system that produces outputs which--in turn--are related to outcomes The conversion of inputs to outputs is a measure of efficiency as the measurement of contributing inputs to impacting outcomes is a measure of efficacy.

• Line Item Budgeting is arguably the simplest form of budgeting, this approach links the inputs of the system to the system. These budgets typically appear in the form of accounting documents that express minimal information regarding purpose or an explicit object within the system.
• Program Budgeting takes a normative approach to budgeting in that decision making--allocating resources--is determined by the funding of one program instead of another based on what that program offers. This approach quickly lends itself to the PPBS budgeting approach.
• PPBS Budgeting or--Program Planning Budgeting System--is the link between the line-item and program budgets and the more complex performance budget. As opposed to the more simple program budget, this decision making tool links the program under consideration to the ways and means of facilitating the program. This is meant to serve as a long-term planning tool so that decision makers are made aware of the future implications of their actions. These are typically most useful in capital projects. The planning portion of the approach seeks to link goals to objects or expected outcomes from specific outputs, which are then sorted into programs that convert inputs to outputs; finally, the budgeting of PPBS helps determine how to fund the program. A leader in the promotion of PPBS was Robert McNamara's use in the United States Government's Department of Defense in the 1960s.
• Performance Based Budgeting attempts to solve decision making problems based on a programs ability to convert inputs to outputs and/or use inputs to affect certain outcomes. Performance may be judged by a certain program's ability to meet certain objectives that contribute to a more abstract goal as calculated by that program's ability to use resources (or inputs) efficiently--by linking inputs to outputs--and/or effectively--by linking inputs to outcomes. A decision making--or allocation of scarce resources--problem is solved by determining which project maximizes efficiency and efficacy.
• Zero-based budgeting is a response to an incremental decision making process whereby the budget of a given fiscal year (FY) is largely decided upon by the existing budget of FY-1. In contrast to incrementalism, the allocation of scarce resources--funding--is determined from a zero-sum accounting method. In government, each function of a department's section proposes certain objectives that relate to some goal the section could achieve if allocated x dollars.
• Flexible Freeze is a budgeting approach pioneered by President George H. W. Bush as a means to cut government spending. Under this approach, certain programs would be affected by changes in population growth and inflation.
• Program Assessment Rating Tool (P.A.R.T.) is an instrument developed by the United States OMB to measure and assess the effectiveness of federal programs that review the program’s purpose and design, strategic planning, program management, and program results and accountability. The scores are rated from effective (ranging between 85 and 100 points), moderately affective (70-84 points), adequate (50-69 points), and ineffective (0-49 points).

Functions of a Budget Document

As a policy document, a government's budget is designed as a plan for implementing its policy. Traditionally, budgets served as a more rigid to implement policy in a retrospective setting. The functions associated with these values are listed under the Traditional Model and are control, management, and planning. With the age of information and its associated innovations, a more elastic and proactive model has emerged that is more reactive and less rigid. The Modern Model has replaced the control function with the monitoring function, the management function with the steering function, and the planning function with the strategic brokering function.

Traditional Model

Control: using the budget document to control expenditures to maximize accountability. This function is most commonly associated with line-item budgets.

Management:using the budget document to manage organizations and personnel. This function is focused on performance and efficiency. This function is most commonly associated with performance budgets.

Planning: using the budget document as a plan to achieve some goal. The focus of this function is on the outcome and effectiveness of a program. This function is most commonly associated with program and PPBS budgets.

Modern Model

Monitoring: as a response to the traditional control function, the monitoring function focuses on the consequences of expenditures.

Steering: as a response to the traditional management function, the steering function serves as a guide for managing.
Strategic Brokering uses the budget document as a means of constantly looking for possible directions and reacting to the environment.

Values in Budgeting

Three values are generally discussed in the literature of public budgeting; accountability, efficiency, and efficacy.

Accountability focuses on the inputs going into the system or program in action and is best characterized by the Line-Item budgeting approach. It is best suited for the control and monitoring functions of a budget.

Efficiency focuses on the process of the system or program and its conversion of inputs (resources) into outputs (policy). It's focus on the process makes this value appropriate for performance budgets and most in-line with management and steering functions.

Efficacy focuses on outputs and outcomes, measuring the impact of policy. This value follows both the program budget and PPBS budget approaches and coinsides with the planning and strategic brokering functions.

Six Steps of the Budgetary Process;

Typically, the budget cycles occurs in four phases The first requires policy planning and resource analysis and includes revenue estimation. The second phase is referred to as policy formulation and includes the negotiation and planning of the budget formation. The third phase is policy execution which follows budget adoption is budget execution—the implementation and revision of budgeted policy. The fourth phase encompasses the entire budget process, but is considered its fourth phase. This phase is auditing and evaluating the entire process and system. See the associated points below:

• Revenue Estimation performed in the executive branch by the finance director, clerk's office, budget director, manager, or a team.
• Budget Call issued to outline the presentation form, recommend certain goals.
• Budget Formulation reflecting on the past, set goals for the future and reconcile the difference.
• Budget Hearings can include departments, sections, the executive, and the public to discuss changes in the budget.
• Budget Adoption final approval by the legislative body.
• Budget Execution amending the budget as the fiscal year progresses.

Types of Public Budgets

• Operating budgets are those documents that describe the expenditures and revenues during a given period for the functioning of an organization.
• Capital budgeting is the process of planning for future purchases above a certain cost threshold or extended life span. This budget is typically accompanied by a Capital Improvement Plan that describes a timeline for acquisition and payment of debt.

 

 

 

Financing government expenditures

 

Government expenditures

Economists classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits--- such as infrastructure investment or research spending--- are classed as government investment. Government expenditures that are not purchases of goods and services, and instead just represent transfers of money--- such as social security payments--- are called transfer payments.

Government operations

Government operations are those activities involved in the running of a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements) for the purpose of producing value for the citizens. Government operations have the power to make, and the authority to enforce rules and laws within a civil, corporate, religious, academic, or other organization or group.^[2] In its broadest sense, "to govern" means to rule over or supervise, whether over a state, a set group of people, or a collection of people.^[3]

Income distribution

• Income distribution - Some forms of government expenditure are specifically intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Likewise, public pension programs transfer wealth from the young to the old. Other forms of government expenditure which represent purchases of goods and services also have the effect of changing the income distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Public education transfers wealth to families with children in these schools. Public road construction transfers wealth from people that do not use the roads to those people that do (and to those that build the roads).
• Income Security
• Employment insurance
• Health Care

Government financing can be achieved by taxes, government borrowing, asset sales, or seigniorage. How a government chooses to finance its activities can have important effects on the distribution of income and wealth (income redistribution) and on the efficiency of markets (effect of taxes on market prices and efficiency). The issue of how taxes affect income distribution is closely related to tax incidence, which examines the distribution of tax burdens after market adjustments are taken into account. Public finance research also analyzes effects of the various types of taxes and types of borrowing as well as administrative concerns, such as tax enforcement.

Taxes

A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity. Taxes consist of direct tax or indirect tax, and may be paid in money or as corvée labor. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government [ . . .] a payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government [ . . .] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."

 Debt

Governments, like any other legal entity, can take out loans, issue bonds and make financial investments. Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government; either central government, federal government, municipal government or local government. Some local governments issue bonds based on their taxing authority, such as tax increment bonds or revenue bonds.

As the government represents the people, government debt can be seen as an indirect debt of the taxpayers. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities such as government bonds and bills. Less creditworthy countries sometimes borrow directly from commercial banks or international institutions such as the International Monetary Fund or the World Bank.

Most government budgets are calculated on a cash basis, meaning that revenues are recognized when collected and outlays are recognized when paid. Some consider all government liabilities, including future pension payments and payments for goods and services the government has contracted for but not yet paid, as government debt. This approach is called accrual accounting, meaning that obligations are recognized when they are acquired, or accrued, rather than when they are paid.

public finance tends to analyse the implication of government taxation and expenditure in a given year

Seigniorage

Seigniorage is the net revenue derived from the issuing of currency. It arises from the difference between the face value of a coin or bank note and the cost of producing, distributing and eventually retiring it from circulation. Seigniorage is an important source of revenue for some national banks, although it provides a very small proportion of revenue for advanced industrial countries.

 Public Finance in Socialist Economies

Public finance in centrally planned economies has differed in fundamental ways from that in market economies. Some state-owned enterprises generated profits that helped finance government activities. The government entities that operate for profit are usually manufacturing and financial institutions, services such as nationalized healthcare do not operate for a profit to keep costs low for consumers. The Soviet Union relied heavily on turnover taxes on retail sales. Sales of natural resources, and especially petroleum products, were an important source of revenue for the Soviet Union. In Venezuela, the state-run oil company PSDVA provides revenue for the government to fund its operations and programs that would otherwise be profit for private owners. Various market socialist systems or proposals utilize revenue generated by state-run enterprises to go fund social dividends, eliminating the need for taxation altogether. In various mixed economies, the revenue generated by state-run or state-owned enterprises are used for various state endeavors; typically the revenue generated by state and government agencies goes into a sovereign wealth fund. An example of this is the Alaska Permanent Fund and Singapore's Temasek Holdings

C A N N O N S  O F  T A X A T I O N

To tax (from the Latin taxo; "I estimate", which in turn is from tangō; "I touch"). Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid). A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government […] a payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government […] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.

The legal definition and the economic definition of taxes differ in that economists do not consider many transfers to governments to be taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by creating money (e.g, printing bills and minting coins), through voluntary gifts (e.g., contributions to public universities and museums),by imposing penalties (e.g,, traffic fines), by borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received.

In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual.

Purposes and effects

Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social engineering, and the operation of government itself. Governments also use taxes to fund welfare and public services. These services can include 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. Colonial and modernizing states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.

Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business, or to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign and military aid, to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy - see also tax exemption), or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.

A nation's tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power.

The resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since (in reality) money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls.

Some economists, especially neo-classical economists, argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimize this distortion. Also, one of every government's most fundamental duties is to administer possession and use of land in the geographic area over which it is sovereign, and it is considered economically efficient for government to recover for public purposes the additional value it creates by providing this unique service.

Since governments also resolve commercial disputes, especially in countries with common law, similar arguments are sometimes used to justify a sales tax or value added tax. Others (e.g. libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism, in which the provision of all social services should be voluntarily bought by the person(s) using them.

The Four "R"s

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.

The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems. This is the most widely known function..

A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections.

A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax. A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies. have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.

Proportional, progressive, and regressive

An important feature of tax systems is the percentage of the tax burden as it relates to income or consumption. The terms progressive, regressive, and proportional are used to describe the way the rate progresses from low to high, from high to low, or proportionally. The terms describe a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition. A progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases. The opposite of a progressive tax is a regressive tax, where the effective tax rate decreases as the amount to which the rate is applied increases. In between is a proportional tax, where the effective tax rate is fixed, while the amount to which the rate is applied increases. The terms can also be used to apply meaning to the taxation of select consumption, such as a tax on luxury goods and the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption and decreases a tax burden on low end consumption.

Direct and indirect

Taxes are sometimes referred to as direct tax or indirect tax. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. In economics, direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction can be subtle between direct and indirect taxation, but can be important under the law.

Tax burden

Diagram illustrating taxes effect

Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become embedded into production costs. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence).

To illustrate this relationship, suppose the market price of a product is US$1.00, and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product is a luxury (in the economic sense of the term), a greater portion of the tax will be absorbed by the seller. This is because a luxury good has elastic demand which would cause a large decline in quantity demanded for a small increase in price. Therefore in order to stabilise sales, the seller absorbs more of the additional tax burden. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price.

Double dividend taxes

In some cases where the economy is not perfectly competitive, the existence of a tax can increase economic efficiency. If there is a negative externality associated with a good, meaning that it has negative effects not felt by the consumer, then the free market will trade too much of that good. By putting a tax on the good, the government can increase overall welfare as well as raising revenue in taxation. This is known as a 'double dividend'.

There are a wide range of goods where there is, or is claimed to be, a negative externality. Polluting fuels (like petrol), goods which incur public healthcare costs (such as alcohol or tobacco), and charges for existing 'free' public goods (like congestion charging) all offer the possibility of a double dividend. This type of tax is a Pigovian tax, sometimes colloquially known as a 'sin tax'. It is worthwhile noting that taxation is not necessarily the only, or the best, method of dealing with negative externalities.

Transparency and simplicity

Another concern is that the complicated tax codes of developed economies offer perverse economic incentives. The more details of tax policy there are, the more opportunities for legal tax avoidance and illegal tax evasion; these not only result in lost revenue, but involve additional deadweight costs: for instance, payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. Perverse incentives also occur because of non-taxable 'hidden' transactions; for instance, a sale from one company to another might be liable for sales tax, but if the same goods were shipped from one branch of a corporation to another, no tax would be payable.

To address these issues, economists often suggest simple and transparent tax structures which avoid providing loopholes. Sales tax, for instance, can be replaced with a value added tax which disregards intermediate transactions.

Tax incidence

Economic theory suggests that the economic effect of tax does not necessarily fall at the point where it is legally levied. For instance, a tax on employment paid by employers will impact on the employee, at least in the long run. The greatest share of the tax burden tends to fall on the most inelastic factor involved - the part of the transaction which is affected least by a change in price. So, for instance, a tax on wages in a town will (at least in the long run) affect property-owners in that area.

Costs of compliance

Although governments must spend money on tax collection activities, some of the costs, particularly for keeping records and filling out forms, are borne by businesses and by private individuals. These are collectively called costs of compliance. More complex tax systems tend to have higher costs of compliance. This fact can be used as the basis for practical or moral arguments in favor of tax simplification (see, for example, FairTax), or tax elimination (in addition to moral arguments described above).

Ethics of taxation

Ethical basis of taxation

According to most political philosophies, taxes are justified as they fund activities that are necessary and beneficial to society. Additionally, progressive taxation can be used to reduce economic inequality in a society. According to this view, taxation in modern nation-states benefit the majority of the population and social development A common presentation of this view, paraphrasing various statements by Oliver Wendell Holmes, Jr. is "Taxes are the price of civilization.It can also be argued that in a democracy, because the government is the party performing the act of imposing taxes, society as a whole decides how the tax system should be organized. The American Revolution's "No taxation without representation" slogan implied this view. For traditional conservatives, the payment of taxation is justified as part of the general obligations of citizens to obey the law and support established institutions. The conservative position is encapsulated in perhaps the most famous adage of public finance, "An old tax is a good tax".Conservatives advocate the "fundamental conservative premise that no one should be excused from paying for government, lest they come to believe that government is costless to them with the certain consequence that they will demand more government 'services'Social democrats generally favor higher levels of taxation to fund public provision of a wide range of services such as universal health care and education, as well as the provision of a range of welfare benefits.^[30] As argued by Tony Crosland and others, the capacity to tax income from capital is a central element of the social democratic case for a mixed economy as against Marxist arguments for comprehensive public ownership of capital. Many libertarians recommend a minimal level of taxation in order to maximize the protection of liberty.

Compulsory taxation of individuals, such as income tax, is often justified on grounds including territorial sovereignty, and the social contract. Defenders of business taxation argue that it is an efficient method of taxing income that ultimately flows to individuals, or that separate taxation of business is justified on the grounds that commercial activity necessarily involves use of publicly established and maintained economic infrastructure, and that businesses are in effect charged for this use Georgist economists argue that all of the economic rent collected from natural resources (land, mineral extraction, fishing quotas, etc.) is unearned income, and belongs to the community rather than any individual. They advocate a high tax (the "Single Tax") on land and other natural resources to return this unearned income to the state, but no other taxes.

Optimal taxation theory

Most governments need revenue which exceeds that which can be provided by non-distortionary taxes or through taxes which give a double dividend. Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of social welfare.

Ramsey problem deals with minimising deadweight costs. Because deadweight costs are related to the elasticity of supply and demand for a good, it follows that putting the highest tax rates on the goods for which there is most inelastic supply and demand will result in the least overall deadweight costs.

Some economists have sought to integrate optimal tax theory with the social welfare function, which is the economic expression of the idea that equality is valuable to a greater or lesser extent. If individuals experience diminishing returns from income, then the optimum distribution of income for society involves a progressive income tax. Mirrlees optimal income tax is a detailed theoretical model of the optimum progressive income tax along these lines.

Over the last years the validity of the theory of optimal taxation was discussed by many political economists. Canegrati (2007) demonstrated that if we move from the assumption that governments do not maximise the welfare of society but the probability of winning elections, the tax rates in equilibrium are lower for the most powerful groups of society, instead of being the lowest for the poorest as in the optimal theory of direct taxation developed by Atkinson and Joseph Stiglitz.

Views opposed to taxation

Because payment of tax is compulsory and enforced by the legal system, some political philosophies view taxation as theft (or as a violation of property rights), or tyranny, accusing the government of levying taxes via force and coercive means Individualist anarchists, objectivists, anarcho-capitalists, and libertarians see taxation as government aggression (see zero aggression principle). The view that democracy legitimizes taxation is rejected by those who argue that all forms of government, including laws chosen by democratic means, are fundamentally oppressive. According to Ludwig von Mises, "society as a whole" should not make such decisions, due to methodological individualism Libertarian opponents of taxation claim that governmental protection, such as police and defense forces might be replaced by market alternatives such as private defense agencies, arbitration agencies or voluntary contributions. Walter E. Williams, professor of economics at George Mason University, stated "Government income redistribution programs produce the same result as theft. In fact, that's what a thief does; he redistributes income. The difference between government and thievery is mostly a matter of legality."

 Discourse surrounding taxation generally places an emphasis on the intended benefits; healthcare, schools and so on, but rarely points to the harm caused by forced removal of possessions.

Taxation has also been opposed by communists and socialists. Karl Marx assumed that taxation would be unnecessary after the advent of communism and looked forward to the "withering away of the state". In socialist economies such as that of China, taxation played a minor role, since most government income was derived from the ownership of enterprises, and it was argued by some that taxation was not necessary. While the morality of taxation is sometimes questioned, most arguments about taxation revolve around the degree and method of taxation and associated government spending, not taxation itself.

Effects of income taxation on division of labor

If a tax is paid on outsourced services that is not also charged on services performed for oneself, then it may be cheaper to perform the services oneself than to pay someone else — even considering losses in economic efficiency.

For example, suppose jobs A and B are both valued at $1 on the market. And suppose that because of your unique abilities, you can do job A twice over (100% extra output) in the same effort as it would take you to do job B. But job B is the one that you need done right now. Under perfect division of labor, you would do job A and somebody else would do job B. Your unique abilities would always be rewarded.

Income taxation has the worst effect on division of labor in the form of barter. Suppose that the person doing job B is actually interested in having job A done for him. Now suppose you could amazingly do job A four times over, selling half your work on the market for cash just to pay your tax bill. The other half of the work you do for somebody who does job B twice over but he has to sell off half to pay his tax bill. You're left with one unit of job B, but only if you were 400% as productive doing job A! In this case of 50% tax on barter income, anything less than 400% productivity will cause the division of labor to fail.

In summary, depending on the situation a 50% tax rate can cause the division of labor to fail even where productivity gains of up to 300% would have resulted. Even a mere 30% tax rate can negate the advantage of a 100% productivity gain.

Kinds of taxes

The Organisation for Economic Co-operation and Development (OECD) publishes perhaps the most comprehensive analysis of worldwide tax systems. In order to do this it has created a comprehensive categorisation of all taxes in all regimes which it covers:

Ad valorem

An ad valorem tax is one where the tax base is the value of a good, service, or property. Sales taxes, tariffs, property taxes, inheritance taxes, and value added taxes are different types of ad valorem tax. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs). An alternative to ad valorem taxation is an excise tax, where the tax base is the quantity of something, regardless of its price. For example, in the United Kingdom, a tax is collected on the sale of alcoholic drinks that is calculated by volume and beverage type, rather than the price of the drink.

Sales tax

Sales taxes are levied when a commodity is sold to its final consumer. Retail organizations contend that such taxes discourage retail sales. The question of whether they are generally progressive or regressive is a subject of much current debate. People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food, utilities and other necessities from sales taxes, since poor people spend a higher proportion of their incomes on these commodities, so such exemptions would make the tax more progressive. This is the classic "You pay for what you spend" tax, as only those who spend money on non-exempt (i.e. luxury) items pay the tax.

Value Added Tax / Goods and Services Tax

A value added tax (VAT), also known as 'Goods and Services Tax' (G.S.T), Single Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the VAT on the higher price, but will remit to the government only the excess related to the "value added" (the price over the cost of the sheet steel). The wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process.

VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax). The difference between output tax and input tax is payable to the Local Tax Authority. If input tax is greater than output tax the company can claim back money from the Local Tax Authority. VAT was historically used to counter evasion in a sales tax or excise. By collecting the tax at each production level, the theory is that the entire economy helps in the enforcement. However, forged invoices and similar evasion methods have demonstrated that there are always those who will attempt to evade taxation

Excises

Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased. For example, in the United States, 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. Excises on particular commodities are frequently hypothecated. For example, a fuel excise (use tax) is often used to pay for public transportation, especially roads and bridges and for the protection of the environment. A special form of hypothecation arises where an excise is used to compensate a party to a transaction for alleged uncontrollable abuse; for example, a blank media tax is a tax on recordable media such as CD-Rs, whose proceeds are typically allocated to copyright holders. Critics charge that such taxes blindly tax those who make legitimate and illegitimate usages of the products; for instance, a person or corporation using CD-R's for data archival should not have to subsidize the producers of popular music.

Excises (or exemptions from them) are also used to modify consumption patterns (social engineering). For example, a high excise is used to discourage alcohol consumption, relative to other goods. This may be combined with hypothecation if the proceeds are then used to pay for the costs of treating illness caused by alcohol abuse. Similar taxes may exist on tobacco, pornography, etc., and they may be collectively referred to as "sin taxes". A carbon tax is a tax on the consumption of carbon-based non-renewable fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The object is to reduce the release of carbon into the atmosphere. In the United Kingdom, vehicle excise duty is an annual tax on vehicle ownership.

Consumption tax

A consumption tax is a tax on non-investment spending, and can be implemented by means of a sales tax or by modifying an income tax to allow for unlimited deductions for investment or savings.

Corporation tax

Corporate tax refers to a direct tax levied by various jurisdictions on the profits made by companies or associations and often includes capital gains of a company. Earnings are generally considered gross revenue less expenses. Corporate expenses that relate to capital expenditures are usually deducted in full (for example, trucks are fully deductible in the Canadian tax system, while a corporate sports car is only partly deductible). They are often deducted over the useful life of the asset purchase. Notably, accounting rules about deductible expenses and tax rules about deductible expense will differ at times, giving rise to book-tax differences. If the book-tax difference is carried over more than a year, it is referred to as a temporary difference, which then creates deferred tax assets and liabilities for the corporation, which are carried on the balance sheet.

Currency transaction tax

A currency transaction tax is a tax placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. There are several types of currency transaction taxes that have been proposed, the most prominent being the Tobin tax and the Spahn tax. Most remain unimplemented concepts.

Environment Affecting Tax

This includes natural resources consumption tax, GreenHouse gas tax (Carbon tax), "sulfuric tax", and others. The stated purpose is to reduce the environmental impact by repricing.

Expatriation Tax

An Expatriation Tax is a tax on some who renounce their citizenship of some governments. The most significant Expatriation Tax is one found in the USA.

The American Jobs Creation act of 2004, passed by the Republican-controlled government, amended section 877 of the Internal Revenue Code of the USA. Under the new law, any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is victim to severe tax laws.

Financial transaction tax

A financial transaction tax is a tax placed on a specific type (or types) of financial transaction for a specific purpose (or purposes). This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers.

There are several types of financial transaction taxes. Each has its own purpose. Some have already been implemented, and some remain unimplemented concepts. Concepts are found in various organizations and regions around the world. Some are domestic and meant to be used within one nation; whereas some are multinational.

Retirement tax

Some countries with social security systems, which provide income to retired workers, fund those systems with specific dedicated taxes. These often differ from comprehensive income taxes in that they are levied only on specific sources of income, generally wages and salary (in which case they are called payroll taxes). A further difference is that the total amount of the taxes paid by or on behalf of a worker is typically considered in the calculation of the retirement benefits to which that worker is entitled. Examples of retirement taxes include the FICA tax, a payroll tax that is collected from employers and employees in the United States to fund the country's Social Security system; and the National Insurance Contributions (NICs) collected from employers and employees in the United Kingdom to fund the country's national insurance system.

Tariffs

tariff (also called customs duty or impost) is a charge for the movement of goods through a political border. Tariffs discourage trade, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay government to maintain a navy or border police. The classic ways of cheating a tariff are smuggling or declaring a false value of goods. Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and, according to an agreed formula, the participating countries share the revenues from tariffs on goods entering the customs union.

Toll

A toll is a tax^] or fee charged to travel via a road, bridge, tunnel, canal, waterway or other transportation facilities. Historically tolls have been used to pay for public bridge, road and tunnel projects. They have also been used in privately constructed transport links. The toll is likely to be a fixed charge, possibly graduated for vehicle type, or for distance on long routes.

Shunpiking is the practice of finding another route to avoid payment of tolls. In some situations where tolls were increased or felt to be unreasonably high, informal shunpiking by individuals escalated into a form of boycott by regular users, with the goal of applying the financial stress of lost toll revenue to the authority determining the levy.

Transfer tax

Historically, in many countries, a contract needed to have a stamp affixed to make it valid. The charge for the stamp was either a fixed amount or a percentage of the value of the transaction. In most countries the stamp has been abolished but stamp duty remains. Stamp duty is levied in the UK on the purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions. Its modern derivatives, stamp duty reserve tax and stamp duty land tax, are respectively charged on transactions involving securities and land. Stamp duty has the effect of discouraging speculative purchases of assets by decreasing liquidity. In the United States transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents.

Wealth (net worth) tax

Some countries' governments will require declaration of the tax payers' balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax is in place for both "natural" and in some cases legal "persons".

Income Tax

An income  tax is a tax levied on the income of individuals or business (corporations or other legal entities). Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or profit tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs). Various systems define income differently, and often allow notional reductions of income (such as a reduction based on number of children supported).

Principles of Income Tax

The "tax net" refers to the types of payment that are taxed, which included personal earnings (wages), capital gains, and business income. The rates for different types of income may vary and some may not be taxed at all. Capital gains may be taxed when realized (e.g. when shares are sold) or when incurred (e.g. when shares appreciate in value). Business income may only be taxed if it is significant or based on the manner in which it is paid. Some types of income, such as interest on bank savings, may be considered as personal earnings (similar to wages) or as a realized property gain (similar to selling shares). In some tax systems, personal earnings may be strictly defined where labor, skill, or investment is required (e.g. wages); in others, they may be defined broadly to include windfalls (e.g. gambling wins).

Tax rates may be progressive, regressive, or proportional. A progressive tax taxes differentially according to how much has been earned. For example, the first $10,000 in earnings may be taxed at 5%, the next $10,000 at 10%, and any more income at 20%. Alternatively, a flat tax taxes all earnings at the same rate. A regressive income tax may tax income up to a certain amount, such as taxing only the first $90,000 earned. A tax system may use different taxation methods for different types of income. However, the idea of a progressive income tax has garnered support from economists and political scientists of many different ideologies, from Adam Smith in The Wealth of Nations to Karl Marx in The Communist ManifestoPersonal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government for those who have overpaid. Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years.

Types of Income Tax

Personal

A personal or individual income tax is levied on the total income of the individual (with some deductions permitted). It is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government for those who have overpaid. Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages.

Corporate

Corporate tax refers to a direct tax levied by various jurisdictions on the profits made by companies or associations and often includes capital gains of a company. Earnings are generally considered gross revenue minus expenses. Corporate expenses that relate to capital expenditures are usually deducted in full (for example, trucks are fully deductible in the Canadian tax system, while a corporate sports car is only partly deductible)over their useful lives by using % rates based on the class of asset they belong to.Notably, accounting rules about deductible expenses and tax rules about deductible expenses will differ at times, giving rise to book-tax differences. If the book-tax difference is carried over more than a year, it is referred to as a temporary difference, which then creates deferred tax or future assets and liabilities for the corporation, which are carried on the balance sheet.

Payroll

A payroll tax generally refers to two kinds of taxes. Taxes which employers are required to withhold from employees' pay, also known as withholding, pay-as-you-earn (PAYE) or pay-as-you-go (PAYG) tax. These withholdings contribute to the payment of an employee's personal income tax obligation; if the payments exceed this obligation, the employee may be eligible for a tax refund or carryforward to future periods.

Other group of payroll taxes are paid from the employer's own funds, either as a fixed charge per employee or as a percentage of each employee's pay. Payroll taxes often cover government social insurance programs such as social security, health care, unemployment, and disability. These payments do not count towards income taxes of employees and employers, but are normally deductible by the employer.

Inheritance

The inheritance tax, estate tax and death duty are the names given to various taxes which arise on the death of an individual. In international 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. However this distinction is not always respected. For example, the "inheritance tax" in the UK is a tax on personal representatives, and is therefore, strictly speaking, an estate tax.

Capital gains tax

A capital gains tax is the tax levied on the profit released upon the sale of a capital asset. In many cases, the amount of a capital gain is treated as income and subject to the marginal rate of income tax. However, in an inflationary environment, capital gains may be to some extent illusory: if prices in general have doubled in five years, then selling an asset for twice the price it was purchased for five years earlier represents no gain at all. Partly to compensate for such changes in the value of money over time, some jurisdictions, such as the United States, give a favorable capital gains tax rate based on the length of holding. European jurisdictions have a similar rate reduction to nil on certain property transactions that qualify for the participation exemption. In Canada, 20–50% of the gain is taxable income. In India, Short Term Capital Gains Tax (arising before 1 year) is 10% [15 % from F.Y 2008-09 as per Finance Act 2008] flat rate of the gains and Long Term Capital Gains Tax is nil for stocks & mutual fund units held 1 year or more, provided the sale of shares involved payment of Securities Transaction Tax and 20% for any other assets held 3 years or more.

Around the world

Income taxes are used in most countries around the world. The tax systems vary greatly and can be progressive, proportional, or regressive, depending on the type of tax. Comparison of tax rates around the world is a difficult and somewhat subjective enterprise. Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national unit. Of course, services provided by governments in return for taxation also vary, making comparisons all the more difficult.

Critics of Income Tax

Critics have stated that poorly created and unfairly implemented income tax systems can penalize work, discourage saving and investment, hinder the competitiveness of business and economic growth. Income taxes are not border-adjustable; meaning the tax component embedded into products via taxes imposed on companies cannot be removed when exported to a foreign country (see Effect of taxes and subsidies on price). Taxation systems such as a national sales tax or value added tax remove the tax component when goods are exported and apply the tax component on imports. The principles of an income tax are also argued by critics. Frank Chodorov wrote "... you come up with the fact that it gives the government a prior lien on all the property produced by its subjects." The government "unashamedly proclaims the doctrine of collectivized wealth. ... That which it does not take is a concession."