Taxes are compulsory monetary payments made by individuals and businesses that are levied by the state. The state collects taxes for five main reasons: to raise revenue, redistribute income, control spending, maintain economic stability, and satisfy specific objectives. There are two main types of taxes - direct and indirect. Direct taxes are paid directly by individuals and companies, while indirect taxes are paid by one entity but the economic burden is passed on to another. Some examples of direct taxes are income tax and corporation tax, while indirect taxes include value added tax and customs duties. An effective tax system should balance factors like equality, certainty, convenience, flexibility and stability to avoid overburdening citizens.

1. PRINCIPLES OF BUSINESS
ROLE OF GOVERNMENT
Taxation
A Tax is
– A compulsory monetary payment made by a business or an
individual, as levied by the State.
The State (government) levies taxes for five main reasons
– Raise revenue to finance its programmes
– Income redistribution
– Control spending of consumers and businesses
– Maintain economic stability
– Satisfy specific objectives
Direct Taxation
A direct tax
1. When the burden and payment of the levy is the responsibility the
individual or the company, it is called a Direct Tax.
2. Only the citizens of the country bear the burden of a direct tax.
3. When the impact (payment) and the incidence (burden) fall on the same
person, it is called a Direct Tax.
This type of tax is often subject to evasion; and is costly to collect when people
don’t comply.
– Income Tax
– Corporation tax
– Capital Gains and Capital Transfer Taxes
– Stamp Duties (on contracts)
– Land Tax

2. Indirect Taxation
An indirect tax
1. When the burden and the payment of the levy are not the responsibility
of the same person, it is called an Indirect Tax.
2. Everyone [residents and visitors] that uses the resources of the country
bear the burden of the indirect tax.
3. When the levy on one person is collected and paid by someone else, it is
called an Indirect Tax.
This type of tax is very difficult to evade because it is levied at the point of
purchase/ consumption.
• Value Added Tax (VAT)
• Customs & Excise Duties
• Purchase Tax
The Tax System
A tax system should be such that citizens do not feel too burdened or
inconvenienced to want to pay the levy.
• Equality
• Certainty
• Convenient
• Economical
• Flexible
• Neutral
• Stable

3. Forms of Tax
Progressive taxation
• A format where those who earn a higher income are required to pay
a larger proportion of their income than those who earn a lot less.
Regressive taxation
• A format where those who earn a higher income is bearing a lesser
burden than those who earn a lot less.
Proportional taxation
• A format where those who earn a higher income are required to pay
the same proportion of their income as those who earn a lot less.
The negative side of taxes
Governments have to be very careful when imposing taxes as the outcome may
not always be what they expected.
• Some tax regimes discourage people from working harder
[progressive taxation]
• Some taxes may lead to price increases – which may cause inflation
• Some tax regimes reduce benefits as one moves to a higher income
• Some taxes have a negative effect on peoples desire to save
• Some taxes can impact the market price mechanics negatively.