Public Finance 1

PUBLIC FINANCE:

Public finance: Public finance can be classified into three groups:   

Government expenditure Government revenue Government debt and its management.

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Government expenditure are all those form of expenditure incurred by the government for development of the country e.g. on new buildings etc. and also the non-development expenditure. Government revenue comes from taxation i.e. direct taxation and indirect taxation. Government debt is obtained from internal and external sources i.e. when the government obtains loans it will be the debt and the use of loans and debt servicing involves management. Loans from internal sources are obtained through selling government securities to the people, whereas external sources are those as the world bank, IMF etc.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE. BALANCING INCOME AND EXPENDITURE:

• An individual adjusts his expenditure in accordance with the given income . • On the other hand, the government, relatively speaking, adjusts its income in accordance with its expenditure.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE:

TIME-SPAN The government declares its expenditure for a certain periods usually one year and meets the required limit within the stipulated time. The individual is not bond to such a requirement. He may plan his expenditure

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE ACQUISITION OF LOANS: • The government may obtain resources internally and externally. e.g. world bank, IMF are externally by selling government securities to the people. • The only visual possibility of obtaining resources in such a periods is from state welfare department.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE EXTRAORDINARY CHANGES • Public finance to a great extent depends upon the type of government. • An individual has no choice, he can only spend within limit.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE FUTURE PLANNING:

• A government will do their almost best to ensure that the future to come will be a prosperous. • Individuals are more optimistic.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE SURPLUS BUDGET: • A surplus government budget reflects a bad image on itself to the people in general. • A surplus budget for the individual is better in the sense that surplus money can be used for purpose.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE • ISSUE OF CURRENCY: • The government prints more money when it feels that the nation has been over burdened with tax. • An individual cannot do so as it is a crime and would result in him going\serving a sentence.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE PUBLICITY OF FINANCE: • The annual budget or rather public finance is made known to all. It is declared by the minister of finance.

• On the other hand individuals are generally more secretive about their budget.

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE RECORD OF FINANCE: • The government usually keeps records of its budgets i.e. of previous years.

• However, the individual is less likely to do so and would spend at his own will regardless to what has happened or what may even happen!

DIFFERENCE BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE Use of financial resources: • The government utilizes its resources for social benefit.

• However,indiviuals generally allocate their resources under the law of equi-marginal utility.

Sources of government revenue:

Sources of government revenue: Taxes: > This is the most important source of government revenue.

> “taxes are general compulsory contribution of wealth levied upon person natural or corporate to defray the expenses incurred in conffering common benefit upon the residents of state. 17

Sources of government revenue: > Fee: > A fee is a form of compulsory payment made by a person for return of service.

> A classic example would be education fees. 18

Sources of government revenue: Price: > This is a compulsory payment for goods provided by the government, for example. multipurpose projects water works etc.

> The government in turn charges a certain price for these goods used by people in general. 19

Sources of government revenue: Special assessment: > This kind of payment is said to be a special form of tax as it only affect a particular locality or area.

> The government builds a bridge connecting mainland and the island. 20

Sources of government revenue: Royatly: > Suppose ‘A’ takes a piece of land from the government and makes a profit of say 100 million.

> Assuming that 20% of the profit is to be paid to the government. 21

Sources of government revenue: Income from government property: > Sometimes government sells its property to obtain revenue e.g. the government property mat be in the forestry sector or any other wide price of land.

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Sources of government revenue: Income from government enterprises: > Government bodies or government enterprises such as the national airlines, insurance agencies, commercial blanks etc. earn substantial amount of profit annually.

> These bodies, surplus income or profit becomes part of the government revenue.

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Sources of government revenue: Interest income: > This form of revenue is obtained by the government through the loans being initiated by it to the respective person.

> Such loans may be for business transactions on behalf of commercial banks. 24

Items of government expenditure:

ITEMS OF GOVERNMENT EXPENDITURE: Defense and internal security: • Expenditure on defense for a country is usually determined by surrounding circumstances.

• Internal security of police and other uniform service is must in every country, for it is in their hands to ensure peace and law and order is maintained.

ITEMS OF GOVERNMENT EXPENDITURE: • Civil administration and courts: • Civil servants and other government staff salaries are paid by the government. • The court, on the other hand, particularly the judiciary are also paid a handsome allowance.

ITEMS OF GOVERNMENT EXPENDITURE: • Education and social welfare: • The government sets up schools and higher mediums of education with the revenue obtained partly and allocated a certain part of its budget for that purpose as well. • Likewise health centre, orphanage homes etc. are setup by the government in the interest of the people in general.

ITEMS OF GOVERNMENT EXPENDITURE: • Communication, transport and irrigation projects: • Roads, railways, ships and airplanes are provided by the government for purposes of transport and communication.

• Likewise irrigation projects such as dams, hydroelectric generators etc. are built for the benefit of the country.

ITEMS OF GOVERNMENT EXPENDITURE: • Foreign relations and foreign loans: • For diplomatic purposes a government would have to build or at least provide money for payment of rent on an embassy in the host country.

• Similarly, the government has to pay back its debt i.e. loans obtained from foreign bodies.

CANONS OF TAXATION:

CANON OF TAXATION: • Canon of equality:

• The word here does not mean that everyone should pay the equal amount of tax.

• What equality really means here is the amount of sacrifice suffered by each tax payer that has got to be equal so that the rich pay more and poor pay less.

CANNON OF TAXATION: • Canon of certainty: • Tax payer ought to be aware of the purpose, amount and manners of payment. • Everything should be made clear and simple for the benefit of the tax-payer. • Uncertainty leads to corruption. • Publicity is usually given to budget proposals for discussion as well as criticism.

CANNON OF TAXATION: • Canon of convenience: • In this canon we say both elements i.e. time and manner of payment must be coventient for tax payer so that he is able to pay his taxes in due time e.g. if farmers were to pay taxes payer on their crops before they were harvested, naturally they would not be able to do so.

CANNON OF TAXATION: • Canon of economy: • This canon means that tax would be economical if the cost of collecting it is very small.

• The whole amount taken out of peoples pocket should go directly to the treasury.

• There should not be any leakage in the way i.e. to say that the expenditure on tax collecting should be kept as low as possible and minimize the tax return

CANNON OF TAXATION: • Canon of productivity:

• This canon means that production should encouraged rather than otherwise. • The productive capacity of the community should not be crippled or impaired. • The government should avoid running into a deficit whenever possible.

CANNON OF TAXATION: • Canon of elasticity: • This would depends upon the state of affairs prevailing in a country.

• As a country’s needs arise, likewise revenue should also be increased otherwise (revenue) will be inadequate e.g. during the phase of war.

CANNON OF TAXATION: • Canon of simplicity:

• This canon emphases that method of taxation should be made a simple procedure for the layman to understand. • It should be plain, nontechnical and straight

CANNON OF TAXATION: • Canon of diversity:

• According to this canon, taxation should be abroad based i.e. to say there should be taxes of all kinds so that the whole community shares the burden. • There should be variety of direct and indirect taxes.

CANNON OF TAXATION: • Canon of economic development:

• Productive resources should be fully utilized in the private sector and it should be allowed. • If the resources are being wasted they ought to be shifted to the government through taxation.

KINDS OF TAXES:

KINDS OF TAXES: • Taxes can be generally classified into two groups: • Direct and indirect tax • Proportional, progressive and regressive tax.

KINDS OF TAXES: • Direct tax: •

Direct taxation are those kinds of tax whose incidence can not be shifted to anyone else. Such a tax is to be borne by the tax payer himself. E.g. income tax

• Indirect tax: •

Indirect tax are those kinds of tax whose incidence is actually being shifted to the ultimate consumer. E.g. daily commodities.

KINDS OF TAXES: • Proportional, progressive and regressive tax: •

A proportional tax is one that is to be paid at a fixed rate i.e. to say it is a fixed rate to everyone.

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If the rate of taxation as a income tax is 5%, then it is the same rate as imposed.

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A progressive tax is a kind of tax which depends upon the level of income .

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As we mentioned earlier in proportional tax, the tax payer with a higher income will naturally pay more but in the case of progressive tax, he will be paying even higher amount of income tax.

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Regressive tax reveals the fact that with an increase in the income tax burden is reduced and vice-versa.

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Such a tax is said to be cruel in the sense that the burden is felt a lot more by the poor than the rich.

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Generally a government would not impose such a tax but never-theless it does happen.