Lecture 1. Taxation - the Conce-t and thq Seience

l.Origins and historical development of taxes2.Economic content of taxes3.Functions of taxation

: 4.The role of taxation in modern statesS.Theories about state regulation of the taxation system

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P.grt 1. Orieins.and Historical Develooment of Taxes

Taxes form an element of the social existence. Human society is heterogeneous fornatural and physiological reasons. Already in antiquity this made people unite their efforts andwealth for the purpose of responding to natural disasters and external enemies, as well as inorder to build common towns, to support the people not able to work and to provide for manyother social needs. Taxes constitute an integral attribute of the state

Taxes became a necessary element of the socio-economic relations at the formation ofthe state. The development and transformation of the state's organisational forms were alwaysassociated with a modification of the taxation system. In the periods of slavery, states usedtaxes in the form of natural charges and duties (i.e. by collecting food, harvest items, etc., ofpersonal obligations), but with the development of commodity-monetary relations, taxes tooka monetary form. Pfimary taxes were initially applied directly on wealth through land andindividual taxes. Secondary taxes appeared later, initially in the form of internal customscharges, and with the development of commodity-monetary relations, in the form of excises,which were paid by all the free individuals.

The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC inthe first dynasty of the Old Kingdom. Records from the tirne decument that the pharaoh wouldconduct a biennial tour of the kingdom, collecting tax revenues from the people, O[her recordsare granary receipts on limestone flakes and papyrus. Early taxation is also described in theBible. In Genesis (chapter 47, verse 24 - the New International Version), it states "But when thecrop comes in, give a tifth of it to Pharaoh. The other four-fifths you may keep as seed tor thefields and as fqod for yourselves and your households and your children." Joseph was telling thepeople of Egypt how to divide their crop, providing a portion to the Pharaoh. A share (207o) ofthe crop was the tax.

In Ancient Rome, during peace times there were no taxes, but in times of war, citizenswere subjected to taxes applied in accordance to their wealth. The tax rate (or the census) wasdetermined once in 5 years. In the IV-[I cenytdes B.Q.1he Roman state was expanding, newtowns-colonies were being conquered a{d the taxation-'system was changing as well.Community (local) taxes and duties were being introduced in the colonies. Rome wasbecoming an empire. The main source of income for the Roman provinces was the land tax;on average its rate constituted L/L0 of the revenue from the land area. Other taxation formswere also used, for example, the tax on fruit trees or vine plants. In addition, chargeable totaxation were real estate, live assets (horned cattle and slaves), and other valuables.

In addition to direct taxes, there were indirect ones, the most important of which were:-Transactions taxes, usually at the rate of ITo-Special taxes on slave transactions of 47o, and-Taxes on the release of slaves at the rate of 57o of their market price. IAlready in the Roman Empire taxes played not only a fiscal role, but also had the

function of stimulating economic development. At that time taxes already had a monetaryform, which forced the population to generate surplus production for sale. This promoted theexpansion of commodity-monetary relations, an intensification of the division of labour and ofthe urbanisation process.

Many economic traditions of the Ancient Rome were adopted in the Byzantine Empire.In the early Byzantine period of up to the end of the VII century, the empire had 21 types ofdirect taxes, including:

. Land taxes

. Iirdividual duties

. Army maintenance taxes

. Taxes on the purchase of horses

. Recruit taxes, which released the person paying the tax from military obligations

. Charges on the sale of merchandise (usually around t0-L2.5Vo)

. Charges for issued state documents

In India, Islamic rulers imposed jizya starting in the llth century. It was abolished byAkbar.

Quite a few records of government tax collection in Europe since at least the 17th centuryare still available today. But taxation levels are hard to compare to the size and flow of theeconomy since production numbers are not as readily available. Government expenditures andrevenue in France during the 17th century went from about 24.30 million livres in 1600-10 toabout L26.86 miltion livres in years1650-1659 to about LL7.99 million livres in years1700-17I0when government debt had reached 1.6 billion livres. In 1780-L789 it reached 42L50 millionlivres. Taxation as a percentage of production of final goods may have reached I5To - 207oduring the 17th century in places like France, the Netherlands, and Scandinavia. During the war-filled years of the eighteenth and early nineteenth century, tax rates in Europe increaseddramatically as war became more expensive and governments beoame more centralized andadept at gathering taxes. This increase was greatest in England, Peter Mathias and PatrickO'Brien found that the tax burden increased by 85Vo over this period- Another study confirmedthis nurnber, finding that per capita tax revenues had grown almost six fold over the eighteenthcentury, but that steady economic growth had made the real burden on each individual onlydouble over this period before the industrial revolution. Average tax rates were higher in Britainthan France the years before the French Revolution, twice in per capita income comparison, butthey were mostly placed on international trade. In France, taxes were lower but the burden wasmainly on landowners, individuals, and internal trade and thus created far more resentment.

The Russian financial system started to develop a little later. The unification of theAncient Russian State began only at the end of the IX century. The main sources of income inthe sovereign's treasury were the tributes. In essence these constituted initially a sporadic, butlater a more systematic direct tax. Indirect taxation existed in the form of sales and courtcharges. Transit dues called "mit" were collected for the transfer of goods through mountaingaps, shipment dues were char$ed for transporting goods over rivers, "hotel" dues werecharged for the right to own warehouses and the "retail" tax was required for the right toorganise market events.

The taxation- system changed its form and improved under the influence of classconflicts. Its regressive character, conditioned by the preponderance of indirect taxes started tochange in the 20'h century in direct conformity with the transition to progressive incometaxation. The taxation system of the 20th century, as a result of the effort( rnade in the financescience and practice is distributing the taxation burden more uniformly than ever in the historyof taxation.

In general, the taxation system is a complex and effective mechanism for the regulationof economic conditions; it is a flexible instrument, which influences the profitability ofvarious ownership forms, and the effectiveness of national economies in the conditions of thecurrent science development and of economic globalisation. However, the taxation policy ofthe state (which is defined as the manoeuvring of the rates and types of taxes) is subject to the

lag effect, in contrast to the banking-monetary policy, Which is caused by the fact that anychange of the tax rate must take the form of a legal document.

\ Part 2. The Economic Content of Taxationi

Taxes are a defined as mandatory payments of the contributors to the budget and to theextra-budgetary funds in the amount determined by law and within the stipulated deadlines.Taxes represent the monetary relations of the state with corporations and individuals regards

to the redistribution of the national income and the mobilisation of financial resources to the

budgetary and non-bud getary funds of the state. Taxes became a necessary element of the

socio-ecorromic relations at the moment of the state formation. The development and

transformation of the organisational forms of the state were always associated with amodification of the taxation system, which depends on the development level of the state'sdemocratic forms.

The economic essence of the state was addressed for the first time in the work of D.Ricardo, who wrote "Taxes form the share of the produce and work of the country, which is

transferred to the government, and ultimately they are always paid from the capital or incomeof the country."

Funds provided by taxation have been used by states and their functional equivalentsthroughout history to carry out many functions. Some of these include expenditures on war, the

enforcement of law and public order, protection of property, ecQnomic 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.Govemments use different ki and varv the tax istributeburden amons individuals or classes of lation involv

or to redistribute resources betw ividuals or classes in the

are intende uooort t the disabled. or the retired bv taxes on those who are stillworking. In addition, taxes are applied to fund foreign and military aid, to influence the

macroeconornic performance of the economy (the government's strategy for doing this is called

its fiscal policy - see also tax exernption), or to modify patterns of consumption or employmentwithin 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

powei. 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

witl be spent. In democratic nations where the public elects those in charge of establishing the

tax systern, 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 amountwhich 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. Thispractice 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 realit]) money is

fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific

Historically. the nobility Werg supported by taxes on the poor; modern social security systems

government programs are then later diverted to the government general fund. In sorne cases,

such taxes are collected in fundamentally inefficient ways, for example highway tolls.

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Some i 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 sovereigp, and it is considered economically efficient for government to recover for public

purposes the additional value it create-s by providing this unique service.

Since governments also resolve commercial disputes, especially in countries with

cofilmon law, similar arguments are sometimes used to justify a sales tax 'or value added tax.

Others (e.g. libertarians) arguo 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.Russian economists also made a certain contribution to the development of the taxation

theory. Among them, N. I. Turguenev mentioned the following: "Taxes are the gssenc

the means for the achievement of the goal of society or the state. i.e. of the gQal that people

assqme for society." Sokolov wrote: "Taxe.s should be understood as the compulsorye state from coroorations and individuals in order to provide

for its costs. without offering the tax-payer a corresponding equivalent." Which means thatthe state collects with the help.of taxes means for the formation of a centralised state fundnecessary for the fulfilment of the state functions.

Taxation theory constitutes a part of the finance science. Taxation plays a role in theprocess of redistribution of the new value, is involved in the process of reproduction, and

constitutes a specific form of production relations. The source of taxation is the newly createdvalue, i.e. the national income. The source of tax payments is the value added of the product

and a fraction of the value of the necessary product.Taxation, as a particular type of production relation, constitutes a specific economic

category with stable internal features, development patterns and forms of manifestation.

However, taxation is not just an economic but also a financial category. Taxation has general

traits pertaining to all the financial relations, but at the same time, it has its own defining

features and functions, which differentiate taxation from the entirety of financial relations.

Part 3. The Functions of Taxation

The functions of taxes are a manifestation of their essence; they are a means to represent

the characteristics of taxes. The functions of taxation illustrate its social purpose of the galue-

trased distribution and redistribution of income.Each of the functions fulfilled by the taxation instrument is a manifestation ,of an

internal feature, an indicator or trait or this economic category. -

While the main function of taxation is to provide revenue. it also has important subsidiaryfunctions and is one of the ways in which the government effects its policies. The first of these is

to reduce the inequality of incomes. This has been achieved - and is still being maintained - byincome tax and capital transfer tax, these taxes are progressive. The amount people pay is in

accordance with what they can afford, so that a person with a high income pays more income tax

than one who earns less and, in addition, account is taken of their financial responsibilities.Consequently, if two individuals receive the same amount in wages bul one is single and the

other is married and has two children, the single person will pay more income tax. This system is

operated by giving allowances and relieves against income. Income tax and capital transfer tax(which replaced estate duty) have, therefore, been the main causes of the more equal distributionwealth, particularly since the end of the Second World War II

The second subsidiary function of taxation is to Control the level of economic activity.Selective employment tax fell into this category, since it encouraged economy in the use oflabour in thb service and construction industries. The repayment of the tax, together withadditional sums to manufacturing; industries in the development areas, was an added incentivefirms to move to those areas and therefore stimulated economic activity in them.

Similarly, a substantial increase in corporation tax could cause firms to limit their plansfor development and expansion, while a reduction in the rate charged would encourage firms toadopt an expansionist policy.

Taxation's third subsidiary function is to influence production and consumption. Theimposition of a tax when goods are bought, or excise duty on certain goods, can reduce the totalconsumption of them. The imposition of tariffs on imported goods, will discourage people frombuying them and stimulate the sales of home-produced goods; This was one of the measures usedat.the end of the 1960s to help to correct the balance of payments.

More detail the functions of taxations can be presented as follows: Taxation theoryusually determine five main functions of taxes: fiscal, redistributbr!, regulating, controlling,and promoting.

1) The main function of taxation rs the fiscal one. It is through fiscality that taxes playtheir role in the formation of the state budget necessary for the realisation of national andholistic state programmes. The fiscal function provides for the achievement of the'main socialgoal of taxation-the formation of the state's financial resources necessary for executing therole of the latter (defence, social, environmental protection, etc.)

- ,2) The allocation function of taxation expresses their essence as a special centralisedinstrument of allocation relations and consists of the social income redistribution amongvarious groups of cittzens: from wealthy to deprived ones, which ultimately provides for theassurance of the social stability of the population.

3) The resulatom function of taxation was initiated as soon as the state started to takeactive part in the economic set-up of the society. This function is aimed at achieving specificgoals of the taxation policy through the taxation mechanism. Taxation regulation entails threesub-functions:

a. The stimulatins sub-function is aimed at the development of special socio-economic processes, and is implemented through a system of allowances, exemptions andpreference affangements. The legislation in force stipulates the stimulation of a number oftaxpayer categories such as the owners of small enterprises, the agricultural producers, capitalinvestors, or charities

b. The destimulatine sub-function inhibits some socio-economic processes throughthe conscious exaggeration of the taxation burden. As a rule, the effect of this sub-function isrelated to the introduction of excessive tax rates. These are, for example, the protectionistmeasures of the state, aimed at supporting local producers through prohibitive import customduties. It is important to keep in mind, nevertheless, that taxation relations, as any otherrelations, must replicate continuously. Taxes must be collected today, tomorrow and always.This is why the utilization of the destimulating sub-function should not lead to the weakeningof the taxation basis, to suppression, or even to liquidation of the tax source. Such anexaggeration may result in a situation where there will be no income/processes to be taxed.

c. The replication (reqenerstionl function is explained as follows: by taxing theutilisation of natural resources, roads, rnineral and primary resources, the state uses theseproceeds in order to regenetate the exploited resources.

4) The controlling function of taxation-through taxation, the state controls thefinancial-economic activity of juridical and natural persons. This also contributes tocontrolling the sources of income and the directions of spending.