What is Public Revenue?
The income of the states is referred to as Public Revenue. In this branch, we study the various ways of raising revenue by the public bodies. We also study the principles and effects of taxation and how the burden of taxation is shared among the various classes of society etc.
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Public expenditure has been increased enormously. The main reason is that the functions of governments have been increased manifold. The modern states are no more police states but welfare states.
Difference Between Public Revenue and Public Receipts
Public revenue includes that income that is not subject to repayment by the government. Public receipts include all the income of the government including public borrowing and the issue of new currency. In this way, public revenue is a part of public receipts.
Public Receipts = Public Revenue + Public Borrowing + Issue of New Currency
Sources of Public Revenue
The sources of public revenue can be broadly classified into two – Tax -source and non-tax sources.
Taxes: Taxes are imposed by the government on the people and it is compulsory on the part of the citizens to pay taxes, without expecting a return.
Definitions of Tax
Types of Taxes
Following are two major category types of taxes:
Direct Taxes
A direct tax is really paid by a person on whom it is legally imposed, while an indirect tax is imposed on one person, but paid partially or wholly by another, owing to consequential change in the terms of some contract or bargaining between them.
A direct tax is one, demanded from the very person who is intended or desired should pay it. Indirect taxes are those which are demanded from the one person in the expectation and intention that we shall identify him at the expenses of another.
Merits of Direct Taxes
Following are the main merits of direct taxes:
Equity
direct taxes such as income taxes, taxes on property, capital gain taxes etc. are progressive in their nature. That is, higher incomes are taxed heavily and lower incomes are taxed lightly. Hence, direct taxes are based on the ability to pay the taxpayer and they ensure the canon of equity.
Economy
The administrative cost of collecting direct taxes is low. The taxpayers directly pay the tax to the state. So there is not much waste of resources and time. That is, direct taxes satisfy the canon of the economy.
Certainty
Another merit of direct tax is that it is certain. The taxpayers know how much tax is to be paid, on what basis tax is paid to the government, etc.
Thus, the taxpayer is able to make adequate provisions for the payment of tax in advance. The government can also plan development activities since they can estimate the amount of revenue they receive in the form of taxes.
Elasticity and Revenue Generation
the yield from direct taxes increases as the country economically advances. The government gets more revenue through direct taxes automatically at higher rates.
Distributive Justice
Since direct taxes are progressive in rates, the tax rate increases as the income of individuals rises. The tax burden will heavily be on the richer sections of society. The increased revenue through taxes is allocated for providing subsidized food, clothing, and housing to the poor and needy people. This will bring about distributive justice in the country.
Civic Consciousness
Direct taxes create civic consciousness among the taxpayers. The taxpayers will be vigilant in the utilization of the tax revenue and will see whether the resources are efficiently used and wastage is avoided.
Absence of Leakages
Since there is the direct payment of taxes by taxpayers to the government, there is no room for any wastage. The whole amount of direct taxes such as income taxes, property taxes, and taxes on capital gains, etc., reaches the treasury without any middlemen.
Demerits of Direct Taxes
The important demerits of direct taxes are explained below:
Uncertainty
The precise degree of needed progression cannot be estimated on account of the difficulties of measuring the ability to pay and the subjective nature of the marginal utility of income.
Unpopularity
Direct taxes are directly imposed on individuals. They have to bear both the impact and incidence of these taxes. Thus they experience their pinch directly. Consequently, direct taxes are not as popular as indirect taxes.
Violation of the Principle of Equity
The burden of direct taxes falls almost exclusively on the richer sections of the society while the poorer section is totally exempted from these taxes. This is unjustified and improper because the burden of state expenditure should be borne by individuals at all levels of society according to their ability to pay.
Large Scale Evasion
Direct tax is based on honesty. The tax is not evaded only when the taxpayer is honest. It is a fact that the people in the higher income groups do not reveal their full income. It is remarked that “direct taxes are a premium on honesty.”
Merits of Indirect Taxes
Convenience
Indirect taxes are more convenient to pay. It is paid at the time of purchase of a commodity. Hence, the tax payer does not feel the burden of tax. The tax is hidden in the price of the commodity bought. It is paid in small amount. The government can also collect it conveniently.
Indirect taxes lead to social welfare: indirect taxes on narcotics and intoxicants reduce the consumption of them which are harmful to health. Reduction in the consumption of such goods will indirectly increase the welfare of the people.
Indirect taxes are justified
indirect taxes are justifiable and equitable. They are paid by all the individuals and when they purchase goods and services.
Indirect taxes help production and investment
Another advantage of indirect taxes is that they perform as powerful tool in moulding the production and investment activities of the economy.
No evasion
Indirect taxes are generally difficult to be evaded as they are included in the price of the commodity. A person can evade an indirect tax only when he decides not to purchase the taxed commodity.
Highly Revenue Yielding in developing countries
direct taxes do not yield much income in developing countries, as the income of the people is very less. Since indirect taxes cover a large number of essential commodities to be consumed by both the rich and the poor in the country, large revenue could be collected.
Demerits of Indirect Taxes
Indirect taxes promote inequality
Indirect taxes are generally imposed on the consumption goods. The poor people have to pay as much by way of indirect taxes on commodities as the rich people. This is unjust and equitable. They are regressive in nature which will promote economic inequality in society by imposing larger burden of taxes on the poor people.
Uneconomical
Indirect taxes involve high costs of collecting them. To raise desired levels of public revenue, taxes should be collected from millions of people.
Lack of civic consciousness
Indirect taxes do not create civic consciousness as the tax payers in most cases do not feel the burden of the tax they pay.
Indirect taxes promote inflation
Another demerit of indirect taxes is that it promotes inflationary tendency in the economy, as they would increase the prices of the taxed goods.
Discourage saving
Indirect taxes discourage savings because they are included in the prices of commodities. Therefore, people have to spend more on the purchase of commodities. This will reduces the disposable income of the people and hence the savings.
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