Taxation As A Fiscal Policy Final

TAXATION AND FISCAL POLICY
BACT 403
First Semester 2020/2021
Presented By
Baba Seidu
Rester Togormey
Eric Padi Nyabey
Saeed Salahudeen
LECTURE ONE
TAXATION AS
FISCAL POLICY
TOOL
OUTLINE
o Learning Objectives
o Definition of Taxation
- As an economic tool
o Tax base & Tax rate
oClassification of Taxes
oCharacteristic of a good Tax System
oSources of Taxation
oProfile of GRA
LEARNING OBJECTIVES
By the end of this lesson, students should be
able to:
o explain the term taxation.
o explain the classification of taxes.
o explain characteristics/attributes of a good
tax system.
o explain fiscal policy, the measures and its
impact on the economy.
DEFINITION OF TAXATION
Taxation is a systematic process that
includes policy, law and administration.
 It is a compulsory levy imposed on

individuals or firms by an organ of
government for public purposes.
DEFINITION OF TAXATION
From the definition we can conclude that Tax has three
characteristics. These are Legal, Political and Social &
Economic.
Legal: it requires that the payment be made. It is a

creation of legislature and is imposed by a statute.
Political: it is imposed by an organ of government
Social & Economic: purpose for which the payment

made.
TAXATION AS AN ECONOMIC TOOL
• Generally, taxation has only been regarded as the
means of revenue mobilization to finance
government expenditure.
• On the contrary, it goes beyond the primary aim of
generating revenue for government activities.
• Government employs taxation as tool to influence
the direction of the economy through fiscal policy.
• Therefore taxation can be used as an instrument to
achieve economic development and growth.
FISCAL POLICY
• Fiscal policy is the use of government revenue,
debt or expenditure to stimulate, direct, control or
influence the behavior of the economy.
Economic Objectives of Taxation
• The following are some economic objectives that can
be achieved through taxation:
• Create employment
• Alleviate poverty
• Reallocation of resources
• To control inflation
• To protect infant industries
• To protect the Balance of Payment position
Social Objectives of Taxation
• Some social objectives can also be achieved through
taxation:
• Redistribution of income to reduce economic inequality

• Discourage the production and consumption of harmful
good
• Provision of social amenities with revenue generated
• Checking lifestyle by imposing higher tax on goods
consume by the rich
Negative Impact of Taxation
• Affect cash flow
• Inflation
• Unemployment
• Less productivity
• Reduction in income levels
• Reduction in investment
• Regressive tax increases economic inequality.
PUBLIC DEBT
• DEBT – Is sum of public debt and publicly guaranteed debt.
• Public debt can be done:
• Domestic (government securities, commercial banks and

central bank)
• External
• Bilateral – country to country, government to government.
• Multilateral – IMF, World Bank, ADB
POSITIVE EFFECTS OF PUBLIC DEBT
• Production
• Consumption
• Employment and income level
• Distribution of wealth
NEGATIVE EFFECTS OF PUBLIC DEBT
• High interest payment
• loans can be associated with unfavorable
conditions
• It can reduce consumption in the short run.
• Crowding out effect
• Depreciation of the local currency
• It may lead to inflation
• Poor/bad credit rating
PUBLIC DEBT AS AN ALTERNATIVE TO TAXATION
• Tax becomes a disincentive after a certain point.

• Debt supports tax smoothing to avoid frequent tax
rate changes.
• Helps align cost with benefits.
• When debt is applied well, it improves the standard
of living.
• Public debt attracts foreign investments.
• Certainty of amount required.
• In emergency situations ( COVID- 19).
GOVERNMENT EXPENDITURE
Government expenditure could be

1. Re-current Expenditure
• Non-Debt
• Interest on Debt (Internal/External)
• Pensions, Gratuities and Social securities
2. Capital Expenditure
• Development expenditure
• Net lending
FORMS OF FISCAL POLICIES
Expansionary fiscal policies – spending more and

reducing taxes.
Contractionary fiscal Policies – decreasing or

maintaining spending whilst increasing tax revenue.
POSITIVE EFFECTS OF GOVERNMENT EXPENDITURE
o Provide social amenities

o Increase productivity
o Increase consumption
o Create employment
o Promote price stability
o Promote balance growth
o Reduce inequality
NEGATIVE EFFECTS OF GOVERNMENT EXPENDITURE
o Reduction in consumption
o Reduction in production
o Reduction in sales and Profit
o Unemployment
o Reduction in credit facilities
FORMS OF ECONOMIC POLICIES
o Automatic stabilizers
o Discretionary fiscal policy

TAX BASE & TAX RATE
o Tax Base: It is the component or measure upon

which the tax is imposed or assessed and every tax
has a base.
o Tax Rate: It is the ratio or percentage imposed on

the tax base to determine the tax liability.
CLASSIFICATION OF TAXATION
o There are different types of taxes, which are

also classified differently based on the economic
perspective
o -Classification by Tax Base
o -Classification by Approach
o -Classification by structure of incidence
A. CLASSIFICATION BY TAX BASE
o Taxes on income, which includes income tax on

individuals and corporate or non-corporate
bodies.
o Taxes on expenditure such as consumption or
production in Value Added Tax (VAT)
o Taxes on capital, which includes capital gain tax
and gift tax on individuals and corporate or
non-corporate bodies.
B. CLASSIFICATION BY TAX APPROACH
o Direct and indirect taxes are the more usual way of

classifying taxes in Ghana
o Direct Taxes are based on the concept that taxes on
income and capital are levied directly on chargeable
persons such as individuals and organizations.
o With this form of taxation, both the impact and
incidence of tax are on the person to whom the
income or gain accrue, therefore there is no tax
shiftability.
o Indirect Taxes are on expenditure through production and
consumption. This is where the Taxpayer’s liability depends on
the volume and /or value of the goods and services purchased.
o They are described as indirect because the impact is on the
person immediately paying the tax liability while the incidence
may be on a different person.
o They are levied on the person providing the goods and services
and usually the burden is passed on to the consumer.
o These taxes include customs and excise duties administered by
the Customs Division of Ghana Revenue Authority and Value
Added Tax (VAT) administered by the Domestic Tax Revenue
Division of the Authority.
o Indirect tax can be further classified into Ad
valorem or Specific duty.
o With Ad valorem duty, the value of the goods or

service is the tax base.
o With Specific duty , the volume of the goods or

service is the tax base.
C. CLASSIFICATION BY TAX APPROACH
o Progressive, Proportional and Regressive Taxes are taxes classified
according to their structure of incidence.
o Progressive Tax: It is a tax regime of which the ratio of tax liability to
income or other tax base rises as income or other tax base increases. In
other words, the rate applied to the base increase with the value of the
base. It means a greater percentage of income is taxed as income increases
and it is described as a graduated form of taxation.
o Proportional Tax: A tax regime is said to be proportional if the ratio
remains constants, which means taxing the same percentage of income at
any level of income or expenditure. It implies that the rate applied to the
base does not change with the value of the base.
o Regressive Tax: It is a tax regime in which the tax ratio falls as income
increases. The rate applied to the base decreases with the value of the base.
It means a smaller percentage of income is taxed as income increases.
CHARACTERISTICS OF TAXATION
o Taxation is a means of mobilizing revenue from private sector to
public sector (treasury) through compulsory monetary
payments on taxable persons and transactions.
o The challenge is to establish a framework that will accomplish
the objective.
o Adam smith (1776) postulated the following canons of taxation
and the principles have survived over the years:
o Equity of tax system
o Certainty of imposition;
o Convenience of payment; and
o Economy in collection
SOURCES OF TAXATION
There are two main sources namely primary and
secondary.
o PRIMARY SOURCES
o Legislation
o Case law
o Treaties
SOURCES OF TAXATION
SECONDARY SOURCES
o Text Books
o Tax Manuals
o Tax Journals
o Tax Bulletin
o Tax Articles
o Tax Research findings
QUESTION FOR DISCUSSION
In December 2019, a novel coronavirus outbreak was
first documented in Wuhan, China
This virus has triggered a crisis for the global economy
and markets including Ghana. With an escalating
number of confirmed cases globally, the World Health
Organization has declared the virus to be a global
pandemic, meaning that it will have a sustained global
impact.
Stakeholders and experts fear the spread of the
coronavirus will destroy economic growth and that
government revenue is likely to decline.
In order to stop the spread of the Covid-19 outbreak,
many countries across the world including Ghana
implemented very tough measures such as introduction
of travel restrictions, social distancing protocols, strict
lockdown to try to contain the virus, the repercussion
of these measures is a total halt to major industrial
production chains.
In response to this crisis, governments and central
banks worldwide have enacted comprehensive and
ample fiscal and monetary stimulus measures to
counteract the disruption caused by the virus.
Consequently, the socio-economic effect of the coronavirus
pandemic has had extensive consequences beyond the spread
of the virus itself and efforts to curb it.
As a final year Taxation student of UPSA, you are required to:
a) Assess the general impact of the pandemic on the economy
of Ghana.
b) Evaluate the effects of the virus on government tax revenue
in Ghana.
c) Make fiscal policy recommendations to address the
economic impact and the shortfall in tax revenue after the
pandemic in Ghana.

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TAXATION AND FISCAL POLICY

 It is a compulsory levy imposed on

Legal: it requires that the payment be made. It is a

Political: it is imposed by an organ of government

Social & Economic: purpose for which the payment

• Redistribution of income to reduce economic inequality

• Domestic (government securities, commercial banks and

• Employment and income level

• Tax becomes a disincentive after a certain point.

Government expenditure could be

Expansionary fiscal policies – spending more and

Contractionary fiscal Policies – decreasing or

o Provide social amenities

o Discretionary fiscal policy

o Tax Base: It is the component or measure upon

o Tax Rate: It is the ratio or percentage imposed on

o There are different types of taxes, which are

o Taxes on income, which includes income tax on

o Direct and indirect taxes are the more usual way of

o With Ad valorem duty, the value of the goods or

o With Specific duty , the volume of the goods or

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