LML4804
NOTES
, 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.
Critical Law Studies CC ©
,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.
Critical Law Studies CC ©
, Progressive, regressive and proportional taxation:
PROGRESSIVE: the greater the persons tax base, the greater his tax
burden (SA – income tax).
REGRESSIVE: the greater the persons tax base, the less of a tax
burden he’ll have (VAT).
PROPORTIONAL: everyone pays the same % of his or her tax base.
CONCEPTS:
Tax Base:
It’s the specific source from which a taxing authority intends to derive tax
revenue.
Taxpayer: The person saddled with the liability of paying tax.
Taxable value: The portion of tax base, expressed as an amount, to which
the tax rate is applied.
Tax rate: A % applied per unit of taxable value in order to calculate the
amount of the tax payable (e.g. 14% VAT).
Tax incidence: Formal incidence rests on the person who is legally obliged
to pay tax but the effective incidence falls on the person who is made
poorer by the imposition of the tax.
Tax burden: Indication of the total impact of tax on a person.
Tax law: Body of law dealing with the charging, assessment and collection
of taxes.
Working through tax legislation
Checklist:
1. Establish what the tax base is.
2. Identify the possible tax payer.
3. Ascertain the date or period of liability.
4. Establish the taxable value.
5. Determine the taxable rate.
6. Establish the date of payment.
7. Are there any exemptions.
Critical Law Studies CC ©
NOTES
, 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.
Critical Law Studies CC ©
,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.
Critical Law Studies CC ©
, Progressive, regressive and proportional taxation:
PROGRESSIVE: the greater the persons tax base, the greater his tax
burden (SA – income tax).
REGRESSIVE: the greater the persons tax base, the less of a tax
burden he’ll have (VAT).
PROPORTIONAL: everyone pays the same % of his or her tax base.
CONCEPTS:
Tax Base:
It’s the specific source from which a taxing authority intends to derive tax
revenue.
Taxpayer: The person saddled with the liability of paying tax.
Taxable value: The portion of tax base, expressed as an amount, to which
the tax rate is applied.
Tax rate: A % applied per unit of taxable value in order to calculate the
amount of the tax payable (e.g. 14% VAT).
Tax incidence: Formal incidence rests on the person who is legally obliged
to pay tax but the effective incidence falls on the person who is made
poorer by the imposition of the tax.
Tax burden: Indication of the total impact of tax on a person.
Tax law: Body of law dealing with the charging, assessment and collection
of taxes.
Working through tax legislation
Checklist:
1. Establish what the tax base is.
2. Identify the possible tax payer.
3. Ascertain the date or period of liability.
4. Establish the taxable value.
5. Determine the taxable rate.
6. Establish the date of payment.
7. Are there any exemptions.
Critical Law Studies CC ©
