1
UGC NET
DAILY
CLASS NOTES
Economics
Public Economics
Lecture – 1
Objectives & Functions of Government,
FD, RD, ERD, PD, Types of Taxations
, 2
Objectives & Functions of Government, FD, RD, ERD, PD,
Types of Taxations
Functions of Government
The policies of government in a mixed economy can be basically categorised into two main heads-
Taxation policy and Expenditure policy. While the former acts as revenue stream for the
government, on the other hand, the latter is concerned with different areas of expenditure. These
two policies together are known as budgetary policy of the government. With the help of the
budgetary policy, the government attempts to enhance the welfare of the whole society and to
increase the economic growth and development. The effects of revenue and expenditure policies
can be categorised into the following functions.
1. Allocation Function
2. Distribution Function
3. Stabilisation Function
Functions of Government
Objectives of Budget
A Government Budget is not only a financial statement, but also a reflection of the government
objectives, policies and their expected effects. The following are the different categories under
which the objectives of the government can be classified.
a) Reduction in Inequalities of Income and Wealth
b) Economic Stability
c) Reallocation of Resources
d) Management of Public Enterprises
, 3
BUDGET RECEIPTS
Budget receipts refer to the estimated money receipts of the government during a particular fiscal
year from all sources namely, tax non-tax and capital sources. These receipts imply the total cash
inflow of the government during a fiscal year.
Budget receipts can be further classified as- Revenue Receipts and Capital Receipts.
1. Revenue Receipts
These are those receipts of the government which neither creates any liability nor it creates
any reduction in the assets of the government. These comprises of tax and non-tax receipts,
duties and fines, interest and dividends receipts on government investments and assets. These
are further classified into:
a) Tax Receipts
A tax is a legally compulsory monetary contribution to the government by different economic
units such as household, firms and other economic units. Taxes are imposed by the government
on different activities, income, property, production, occupation, etc. The main motive of
imposing taxes is to raise revenue and to incur various expenditures for enhancing welfare of
the country. The following are the various types of taxes.
i. Direct and indirect taxes
ii. Progressive and regressive taxes
iii. Ad valorem and specific taxes
i. Direct and Indirect Taxes
Direct Taxes are those taxes which are borne by the person on whom it is imposed. For example
- Income tax, wealth tax, etc. The burden of such taxes cannot be shifted on to other.
As against this, indirect taxes are those taxes in which the burden of tax shifts from the payer to
the bearer. For example, in case of sale tax, the seller is liable to pay the tax, however; the burden
of bearing the tax falls on the customer. The seller collects the tax from the customer and pays it
to the government.
, 4
ii. Progressive and Regressive Taxes
Progressive taxes are those taxes in which the rate of tax increases with the increase in income of
an individual. For example, with 10% rise in the income of a person, the tax rate also increases
by 10%, then it is case of progressive taxation.
On the other hand, regressive taxes are those taxes in which the rate of tax falls with a rise in
income. For example, with 10% rise in the income of a person, the tax rate decreases by 5%, then
it is case of regressive taxation.
iii. Advalorem and Specific Taxes
The literally meaning of advalorem implies according to value. Advalorem taxes or value added
taxes are indirect taxes which are imposed on the value added at each stage of production. In other
words, these taxes are levied as a percentage of the cost of supply.
On the contrast, specific taxes are those taxes where the level of tax is fixed independent of value
of the item that is purchased. These are imposed on the basis of the weight or units of the
commodity. Tax levied on cigarettes is an example of specific tax.
b) Non-Tax Receipts
Non-tax receipts refer to those budget receipts of the government from sources other than taxes
such as interest receipts, dividends, fines, duty fees, etc. Various non-tax receipts of the
government can be classified as:
i. Fees and License - The government receives fees in return of various services provided
by it to the people. Example - college fees, passport fees, registration fees, etc.
ii. License Fees - These refer to the fees that are received by the government in return of the
allowances granted to the people to perform certain activities. Example - Fees received
from issue of import licenses.
iii. Escheat - Escheat refers to the income from a property of a person who dies without having
any legal heirs. In other words, the government acquires legal right over a property which
has no claimant.
iv. Fines and Penalties - Fines and penalties are imposed by the government on those who
boycott law.
v. Forfeitures - Forfeitures refer to the penalties imposed by the court for non-compliance
with its orders.
vi. Gifts and Grants - Gifts, grants and donations received by the government in events of
natural calamity, war, etc. also form a source of revenue for the government.
vii. Income from Public Enterprises - Income and profits from various enterprises owned by
the government such as railways, SAIL, etc. forms an important source of revenue for the
government.
viii. Special Assessment - Special assessment refers to those payments that are made by the
owners of property who have experienced capital gains as a result of the developmental
UGC NET
DAILY
CLASS NOTES
Economics
Public Economics
Lecture – 1
Objectives & Functions of Government,
FD, RD, ERD, PD, Types of Taxations
, 2
Objectives & Functions of Government, FD, RD, ERD, PD,
Types of Taxations
Functions of Government
The policies of government in a mixed economy can be basically categorised into two main heads-
Taxation policy and Expenditure policy. While the former acts as revenue stream for the
government, on the other hand, the latter is concerned with different areas of expenditure. These
two policies together are known as budgetary policy of the government. With the help of the
budgetary policy, the government attempts to enhance the welfare of the whole society and to
increase the economic growth and development. The effects of revenue and expenditure policies
can be categorised into the following functions.
1. Allocation Function
2. Distribution Function
3. Stabilisation Function
Functions of Government
Objectives of Budget
A Government Budget is not only a financial statement, but also a reflection of the government
objectives, policies and their expected effects. The following are the different categories under
which the objectives of the government can be classified.
a) Reduction in Inequalities of Income and Wealth
b) Economic Stability
c) Reallocation of Resources
d) Management of Public Enterprises
, 3
BUDGET RECEIPTS
Budget receipts refer to the estimated money receipts of the government during a particular fiscal
year from all sources namely, tax non-tax and capital sources. These receipts imply the total cash
inflow of the government during a fiscal year.
Budget receipts can be further classified as- Revenue Receipts and Capital Receipts.
1. Revenue Receipts
These are those receipts of the government which neither creates any liability nor it creates
any reduction in the assets of the government. These comprises of tax and non-tax receipts,
duties and fines, interest and dividends receipts on government investments and assets. These
are further classified into:
a) Tax Receipts
A tax is a legally compulsory monetary contribution to the government by different economic
units such as household, firms and other economic units. Taxes are imposed by the government
on different activities, income, property, production, occupation, etc. The main motive of
imposing taxes is to raise revenue and to incur various expenditures for enhancing welfare of
the country. The following are the various types of taxes.
i. Direct and indirect taxes
ii. Progressive and regressive taxes
iii. Ad valorem and specific taxes
i. Direct and Indirect Taxes
Direct Taxes are those taxes which are borne by the person on whom it is imposed. For example
- Income tax, wealth tax, etc. The burden of such taxes cannot be shifted on to other.
As against this, indirect taxes are those taxes in which the burden of tax shifts from the payer to
the bearer. For example, in case of sale tax, the seller is liable to pay the tax, however; the burden
of bearing the tax falls on the customer. The seller collects the tax from the customer and pays it
to the government.
, 4
ii. Progressive and Regressive Taxes
Progressive taxes are those taxes in which the rate of tax increases with the increase in income of
an individual. For example, with 10% rise in the income of a person, the tax rate also increases
by 10%, then it is case of progressive taxation.
On the other hand, regressive taxes are those taxes in which the rate of tax falls with a rise in
income. For example, with 10% rise in the income of a person, the tax rate decreases by 5%, then
it is case of regressive taxation.
iii. Advalorem and Specific Taxes
The literally meaning of advalorem implies according to value. Advalorem taxes or value added
taxes are indirect taxes which are imposed on the value added at each stage of production. In other
words, these taxes are levied as a percentage of the cost of supply.
On the contrast, specific taxes are those taxes where the level of tax is fixed independent of value
of the item that is purchased. These are imposed on the basis of the weight or units of the
commodity. Tax levied on cigarettes is an example of specific tax.
b) Non-Tax Receipts
Non-tax receipts refer to those budget receipts of the government from sources other than taxes
such as interest receipts, dividends, fines, duty fees, etc. Various non-tax receipts of the
government can be classified as:
i. Fees and License - The government receives fees in return of various services provided
by it to the people. Example - college fees, passport fees, registration fees, etc.
ii. License Fees - These refer to the fees that are received by the government in return of the
allowances granted to the people to perform certain activities. Example - Fees received
from issue of import licenses.
iii. Escheat - Escheat refers to the income from a property of a person who dies without having
any legal heirs. In other words, the government acquires legal right over a property which
has no claimant.
iv. Fines and Penalties - Fines and penalties are imposed by the government on those who
boycott law.
v. Forfeitures - Forfeitures refer to the penalties imposed by the court for non-compliance
with its orders.
vi. Gifts and Grants - Gifts, grants and donations received by the government in events of
natural calamity, war, etc. also form a source of revenue for the government.
vii. Income from Public Enterprises - Income and profits from various enterprises owned by
the government such as railways, SAIL, etc. forms an important source of revenue for the
government.
viii. Special Assessment - Special assessment refers to those payments that are made by the
owners of property who have experienced capital gains as a result of the developmental
