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BAB2205 Malaysian Taxation System Taxation and The Modern Economy (Part 1)
Lecture 1
1. Roles of the state and revenue systems 2. Importance of taxes 3. Principles behind the design of an effective tax system 4. Potential bases of taxation 5. Tax terminology 6. Types of taxes 7. Determinants of tax compliance
Source of Funds
It has been said that 'what the government gives it must first take away'. The economic resources available to society are limited, and so an increase in government expenditure normally means a reduction in private spending. (James and Nobes, 2009, p. 7) IMPORTANT : Fund raising to finance government spending
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Very difficult, or even impossible!!! Market failure pricing, free rider Thank you for calling the Police Station; press 1 for bank robbery; press 2 for snatch thieve please key in your credit no. or verification.
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Purpose of Tax
Tax revenue most important/ primary source of public revenue Secondary purpose/purposes:
To effect social and economic changes Redistribution - e.g. redistribution of wealth (closing poverty gap) Repricing - e.g. high taxes on cigarettes to discourage smoking (Sin Tax)
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What is Tax?
Compulsory payment levied by government on taxpayers to meet public expenditure. a tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the taxpayer in return, and not imposed as penalty for any legal offence. (Hugh Dalton, 2003)
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Flat tax
Tax rate is fixed as the amount to which the rate is applied increases Effect - the same % is taken from everyone regardless of how much or how little they earn
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Lecture Illustration
A local government has came up with a new property tax. The tax base is the assessed value of the real property and it has a 2 rate structure: 2% for assessed value from 0 RM250k 1% for assessed value > RM250k Is this a fair tax system? The most optimum tax rate system - progressive or a flat tax system?
Taxpayer
A taxpayer is :
Any person or organisation required by law to pay tax to the government Person the term refers to both natural persons or corporations separate legal persons
Tax rate
% or other unit of measurement Flat or graduated Statutory v effective
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Jurisdiction
Jurisdiction the right of a government to levy the tax on the person or organisation There must be rational connection between the tax levying government and the taxpayers, e.g.,
residence basis worldwide income source basis domestic income
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Incidence
Incidence refers to the person who bears the ultimate burden of the tax
Formal incidence - person who has the legal liability to pay the tax Economic incidence the actual person who suffers the tax liability
Tax Incidence
Direct tax (e.g. income tax) Taxpayer Tax Office Formal = economic incidence
Lecture Illustration
Adam owns 8 apartments, all rented out. He charges each tenant RM6,000 per annum. Government increases Adams property tax by RM2,400 (total for 8 apartments) Adam plans to increase rental for each tenant by RM300 Tax Office
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Indirect tax (e.g. goods & services) Restaurant Taxpayer Formal economic incidence
Can Adam do so? who bears the incidence of the tax increase?
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Lecture Illustration
Inelastic demand change in price has little effect on demand
Assuming supply of apartments is very limited Tenants will accept the increase, thus are the economic incidence Adam will be the formal incidence Other examples - cigarettes & alcohol
Can shift burden to consumer
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Lecture Illustration
Elastic demand - change in price has significant effect on demand
Assuming apartments are over supplied Tenants may not accept the increase (thus terminate tenancy) Adam will be the economic incidence Other examples - ???
Cannot shift burden to consumer
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Tax Base
Computation of tax involves 2 items: The tax base; and The tax rate: Tax (T) = Base (B) x Rate (R) Tax base all the items, occurrence, transactions or activities subject to a tax
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Generally a broader based tax would raise more revenue. The broader the base, the lower the rate can be. Also, a broader base will help achieve the principle of neutrality.
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Excise tax* levied on the quantity of goods produced, i.e. a specific tax and not an ad valorem tax:
Focuses on a narrow base of products Regressive e.g. excise tax of RM190 per 1,000 sticks of cigarettes is imposed in Malaysia (in addition, 25% of sales tax is levied).
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Inheritance tax death tax Property tax levied on the value of a property
e.g. house ownership tax in China
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Tax Compliance
McBarnet (2001) distinguishes between different forms of compliance: (a) committed compliance is taxpayers willingness to pay their taxes without complaints; (b) (b) capitulative compliance refers to reluctantly giving in and paying taxes; whereas (c) (c) creative compliance is defined as engagement to reduce taxes by taking advantage of possibilities to redefine income and deduct expenditures within the brackets of the law. (Kirchler, E. 2007, p. 22) Critical Success Factor Tax Compliance Behaviour!
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Uncertainty in what is taxable or can be claimed as a deduction reduces compliance to the law.
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Tax returns filing and payment become more convenient and favourable.
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E.g., public consultation involving business communities and NGOs to discuss GST implementation.
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