LML4804 - Notes (Summary)

TAX LAW NOTES: STUDY UNIT 1 INTRODUCTION TO TAXATION State Expenditure and Financing: State expenditure is financed through: 1. Increasing the supply of money in the economy – minting own money; 2. Loans; 3. Generating own income. Generating states “Own Income” can be done by; 1. Sale or lease of property; 2. State enterprises and monopolies; 3. Taxes, duties, levies, and user charges. What is tax? Compulsory contribution, payable in money or in kind, to a taxing authority, aimed at funding public expenditure. It can’t be levied as a counter performance for identifiable public services and need. It does not necessarily take the taxpayers ability to pay nor the benefits received from the public services into account. Taxes, Duties and Levies: these terms are synonymous and are state income. They are just used “loosely” by lay people and politicians. User charges – these are charges linked to a specific type of service used. Income received from this service is used for that specific service. Examples: Toll Road Fees, Water and Electricity. The ideal tax system:  There must be a sufficient connection between the State and the taxpayer to justify the taxpayer’s tax liability.  The connecting factors: 1) SOURCE – income derived from a source within the Republic. 2) RESIDENCE – (income accrues to a resident of the taxpaying state). 3) CITIZENSHIP – income accrues to a citizen of the Taxpaying State. South Africa – predominant factor is source. Downloaded by Ezile Njisane () lOMoARcPSD| CLS cc © LML4804 - TAX Notes Critical Law Studies CC © 2 The Tax Base:  The bases on how tax can be paid 1) Benefit theory: taxed in accordance with the benefits he receives from the various public services. (Impossible to determine how much a person benefits from a particular service/s). 2) Ability to pay theory: make a contribution corresponding to the sacrifice the tax requires of him and in the end everyone must make an equal sacrifice (has too many practical problems) – SA. 3) Ability to earn theory: ability to earn can also be used as a criterion but it’s problematic, i.e. if someone inherits money etc. THREE broad tax bases are commonly utilized: 1) INCOME 2) CONSUMPTION (expenditure) 3) WEALTH An equitable tax system: The “Ideal tax system = Equality criteria” – The Margo Commission mentioned the following criteria:  Tax neutrality – a person should not be influenced by the tax system to choose one course of action above another – so tax liability will be reduced.  Equity – horizontal equity requires that similar persons that are in similar circumstances will be taxed. Vertical equity means that taxpayers experiencing different circumstances will be taxed differently – equal sacrifices.  Certainty and simplicity – certain and simple to assess and collect.  Cost-effectiveness – cost of collecting tax shouldn’t be high. Direct and Indirect taxes: DIRECT: It is intended and expected that the person who is legally bound to pay the tax is the same person who will ultimately be poorer for paying the tax, e.g. tax on the person’s income. INDIRECT: The person who has the legal obligation to pay the tax is not necessarily the person who bears the tax in the end and thus becomes poorer. The taxpayer will pass on the tax to someone else, e.g. VAT.