PUBLIC FINANCE EXPLAINED

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PUBLIC FINANCE EXPLAINED

 – Is the study of how the government or public sector pays for or finance expenditures through taxes and borrowing .Public finance adapts and applies the fundamental microeconomic theory  of markets to the public sectors and government sectors.In particular,this area of study analyses the efficiency of taxes and the market failure  of public goods.Public finance is also a key to the study of government stabilization  polices that address the inflation and unemployment problems of business cycle.

THE FOLLOWING ARE THE FUNCTIONS OF THE GOVERNMENT.

  1. The government makes sure it maintains peace and harmony by providing security among their people. The government does it through employing policemen, armed forces, magistrate etc.
  2. Administrative function,

The government is responsible for the day to day running of activities in the economy, i.e. the government sets different departments and sectors to enable it administer their activities in its economy.

  1. Social function.

The government provides social needs such as education, health, housing etc.

  1. Development function.

The government provides funds for projects like roads construction, rural electrification, irrigation etc.

   DIVISION OF PUBLIC FINANCE.

Public finance is divided into four areas including

  1. Public revenue
  2. Public expenditure
  3. Government budget
  4. Public borrowing / debt

GOVERNMENT REVENUE.

Refers to the amount of money which received by the government from different sources.

The following are source of government revenue;

  1. i) Tax: is a compulsory payment levied by the government on individuals or companies to meet the expenditure which is required for public welfare.
  2. ii) Fees: Are all payment made to the government on any direct services rendered/provided. E.g. payment of road licenses, stamp duty.

iii) Fines: Are penalties imposed by the government to the low breakers.

  1. iv) State property:(Also known as public property)is a property that is owned by all, but is is accessed and use is controlled by the state.An example is a National Park or National Stadium.
  2. v) Selling of public good: Like government shares,Through privatization of public companies like Tanesco in 2005,National Micro-finance Bank (NMB) in Tanzania  hence the amount of money earned is revenue.
  3. vi) Profit obtains from government properties like bus stations and public buses like UDA,uses of roads and airports etc.

vii) Special assessment: It is amount of money charged to people living in an area for specific purpose.

viii) Internal loan from central Bank for different uses like government projects.

  1. ix) External loan from International financial Institution WORLD BANK, IMF and Development bank.
  2. x) Grant and gifts inform of cash.
  3. xi) Foreign Investment

xii) Gambling.

         TAXATION.
is the imposition or infliction of taxes.The process whereby charges are imposed on individuals/property by legislative branch of the state or federal government to raise funds for public purposes.
The following principles or cannons are important for good tax system when tax is imposed it must fulfill the following conditions.

CANONS OF TAXATION (PRINCIPLE)
According to Adam smith there are four important canons of taxation which are( canons of equity,certainty,convenience and economy)and other additions like canon of productivity,elasticity,flexibility,simplicity and diversity as discussed below.

1. Canon of Equity.
he principle aims at providing economic and social justice to the people. According to this principle, every person should pay to the government depending upon his ability to pay. The rich class people should pay higher taxes to the government, because without the protection of the government authorities (Police, Defence, etc.) they could not have earned and enjoyed their income. Adam Smith argued that the taxes should be proportional to income, i.e., citizens should pay the taxes in proportion to the revenue which they respectively enjoy under the protection of the state.
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2. Canon of Certainty
According to Adam Smith, the tax which an individual has to pay should be certain, not arbitrary. The tax payer should know in advance how much tax he has to pay, at what time he has to pay the tax, and in what form the tax is to be paid to the government. In other words, every tax should satisfy the canon of certainty. At the same time a good tax system also ensures that the government is also certain about the amount that will be collected by way of tax.


3. Canon of Convenience
The mode and timing of tax payment should be as far as possible, convenient to the tax payers. For example, land revenue is collected at time of harvest income tax is deducted at source. Convenient tax system will encourage people to pay tax and will increase tax revenue.


4. Canon of Economy


This principle states that there should be economy in tax administration. The cost of tax collection should be lower than the amount of tax collected. It may not serve any purpose, if the taxes imposed are widespread but are difficult to administer. Therefore, it would make no sense to impose certain taxes, if it is difficult to administer.


 Additional Canons of Taxation
Activities and functions of the government have increased significantly since Adam Smith’s time. Government are expected to maintain economic stability, full employment, reduce income inequality & promote growth and development. Tax system should be such that it meets the requirements of growing state activities.
Accordingly, modern economists gave following additional canons of taxation.


5. Canon of Productivity
It is also known as the canon of fiscal adequacy. According to this principle, the tax system should be able to yield enough revenue for the treasury and the government should have no need to resort to deficit financing. This is a good principle to follow in a developing economy.


6. Canon of Elasticity
According to this canon, every tax imposed by the government should be elastic in nature. In other words, the income from tax should be capable of increasing or decreasing according to the requirement of the country. For example, if the government needs more income at time of crisis, the tax should be capable of yielding more income through increase in its rate.


7. Canon of Flexibility
It should be easily possible for the authorities to revise the tax structure both with respect to its coverage and rates, to suit the changing requirements of the economy. With changing time and conditions the tax system needs to be changed without much difficulty. The tax system must be flexible and not rigid.


8. Canon of Simplicity
The tax system should not be complicated. That makes it difficult to understand and administer and results in problems of interpretation and disputes. In India, the efforts of the government in recent years have been to make the system simple.

9. Canon of Diversity
This principle states that the government should collect taxes from different sources rather than concentrating on a single source of tax. It is not advisable for the government to depend upon a single source of tax, it may result in inequity to the certain section of the society; uncertainty for the government to raise funds. If the tax revenue comes from diversified source, then any reduction in tax revenue on account of any one cause is bound to be small.

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