Course # AIS 2305: Theory

& Practices of Taxation

Taxation: An Introduction
(Public Finance)

Key Words / Outline

Slide 1-2

Issues to be discussed:
Public Finance and the Type of Economy
Public Finance and Tax as a Source of
Public Revenue
Other Sources of Public Revenue vs.
Taxation
Public Finance vs. Private Finance
Importance of Public Finance

Slide 1-3

Public Finance and Type of Economy

In a country, which goods are to be produced, at what
quantity, how to be produced and how the produced
goods to be distributed depend on the type of the
economy.
Capitalist economy (e.g., the USA): Size of the govt. is
minimum and the role is of regulatory nature.
Socialist economy (e.g., Cuba): Role of the govt. is
pervasive and the size of the private property is very
minimum and the govt. produces and distributes all the
goods.
Mixed economy (e.g., Bangladesh): Both the private and
the public sectors are of equal importance.
Public finance (i.e., financing by the govt.) is thus
dependent on the size and role of the government.

Slide 1-4

Public Finance vs. Taxation

Public Finance is the funding by government.
Public finance, also known as public sector economics, focuses on
the taxing and spending activities of government and their influence
on the allocation of resources and distribution of income Harvey S.
Rosen (1985).
Public finance deals with the finance of the public as an organized
group under the institution of government Philip E. Taylor (1970).
Scope of Public Finance:
Public revenue (Taxation, Printing currency, Charging for public
goods, and Borrowing)
Public expenditures: Revenue and Development exp
Financial administration (Preparation of budget, passing and
implementation of budget, government audit, etc.)
But in a narrow sense, public finance mainly deals with the public
revenue and tax is one of the sources of public revenues.
Tax is referred to as the compulsory, unrequited payments to
general government.

Other Sources of Public Revenue

vs. Taxation

Slide 1-5

Public revenue comes from four sources:

Taxation,
Printing currency,
Charging for public goods, and

Borrowing.

Printing Currency: Govt. is the only authority that can print currency as a legal
tender to finance its activities. But printing currency for additional financing is
often called as the debasement of the currency (or inflation tax), because it will
reduce the purchasing power of the currency and create inflation.
Charging for Public Goods: Govt. may charge for the goods and services it
provides. This is quite straightforward where the govt. operates like a
commercial business. However, where nonrivalry and non-excludability exist, it
would be very difficult, or even impossible, or very costly if possible, to charge
individuals directly on the basis of the use of many govt. services.
Borrowing: Govt. may raise money by borrowing. Govt. can borrow either from
their own citizens or from overseas. However, public debt (interest and
principal) has to be serviced and debt financing, therefore, adds to the future
budgetary commitments of the government authorities.
Taxation has its limits as well, but they considerably exceed the amounts that
can be raised by resorting to other three sources. So while govt. often use all
four methods of raising resources, taxation is usually by far the most important
source of govt. revenue, because of its characteristics in achieving govt.
financial, economic, political and social objectives.

Other Sources of Public Revenue

vs. Taxation

Slide 1-6

Other Classification of Public Revenues

A.
B.

Tax revenues
Nontax revenues:
1. Commercial revenue received in the form of prices
2. Administrative revenues:
i. Fees
ii. Licence Fee
iii. Special Assessment
iv. Fines and Penalties
v. Forfeitures
vi. Escheat (the claim of a government to the property of a person
who dies without having any legal heirs or without keeping a will)

3. Gifts and grants

Slide 1-7

Public Finance vs. Private Finance

Similarities:
Related to satisfying wants
Borrowing and repayment of debts
Surrounded by economic activities such
as production, investment and
exchanges
Maximization of welfare from the
resources used in financing
Creation of financial assets

Public Finance vs. Private Finance

Slide 1-8

Dissimilarities:
Point of Diff.

Public Finance

Private Finance

1. Income and
expenditure
policy

Expenditure planning first,

then raising funds

Expenditure planning according to

income

2. Sources of
revenues

Taxation, printing currency,

charging for public goods, and
borrowing

Current income, past savings and

personal borrowing

3. Compulsory
acquisition of
resources

Only government has this

authority (like tax collection)

Private sector cannot use coercion

to acquire income or resources in a
civilized society

4. Forms of
borrowing

Govt. can take non-repayable

loan and can take loan
internally or externally

Private sector cannot take nonrepayable loan and cannot take

loan internally

5. Rate of interest
on borrowing

Very low due to very high

credit-worthiness and
sometimes due to use of
coercion

Normally depends on creditworthiness and collateral and

usually high

Public Finance vs. Private Finance

Slide 1-9

Dissimilarities:
Point of Diff.

Public Finance

Private Finance

6. Creation of
currency

Government can print currency to

finance, which is a back-borrowing
and debasement of currency

Private sector cannot print

currency

7. Principle of
financing

Budget principle guided by

decisions made through political
and administrative system and
based on general social objectives

Market principle guided by

economic rationality and hence
profit-oriented and follows quid
pro quo

8. Budget
planning

Govt. can adopt balanced budget,

surplus budget, or deficit budget
and usually the budget is annual
consistent with long-term planning

Private sector can adopt

balanced or surplus budget, but
no deficit budget, and the budget
may be for any period

9. Environmental
influence

Govt. expenditures have specific

objectives (full employment,
economic growth, stabilization etc.)
and not influenced by the
surrounding environment

Private sector expenditures are

influenced by the surrounding
environment, standard of living,
consumption-habit etc.

Public Finance vs. Private Finance

Slide 1-10

Dissimilarities:
Point of Diff.

Public Finance

Private Finance

10. Relationship
between
expenditure
and welfare

Govt. expenditures do not follow the

law of equi-marginal utility, but govt.
tries to maximize the social utility from
the govt. expenditures

Private sector expenditures

do follow the law of equimarginal utility

11.Time period of
expenditure

May be very long-term due to having

perpetual entity by the state and return
from some projects may be readily
available

Usually short-term and

return from investment is
expected within a specific
period

12. Publicity of
income and
exp. account

Mandatory disclosure through budget

announcement and various statistics on
national income accounting

Usually kept confidential

13. Effect of
income & exp.

On the whole society and far-reaching

On individual family or at
best on relatives & friends

14. Provision of
insolvency

Provision of insolvency is not applicable Provision of insolvency is

applicable

Slide 1-11

Importance of Public Revenue

Public Finance is of high importance due to its following
roles:
Controlling unfair competition or monopoly
Provision of social goods to satisfy merit wants (health,
education, etc.)
Reducing or prohibiting production or consumption of demerit
goods
Redistributing income and wealth
Maintaining price stability
Enhancing employment
Maintaining socially desirable economic growth
Reducing negative externalities in case of investments as far
as possible
Maintaining law, order and security
Forming capital and investment, etc.

Slide 1-12

End of the Presentation

Thank you.