Canon of Taxation, Sources of Public Revenue, Theories of Tax Incidence, and Incidence of Tax on Monopoly

Public Revenue
The income of government from all the sources is called Public Revenue.
●Canons of Taxation :
Adam Smith’s canon of taxation:

1. Canon of Equality:
According to this canon, every person have to pay tax according to their ‘ability to pay’. It simply doesn’t mean that all person have to pay equal amount of tax. It simple means, if a person is rich i.e., his paying ability is high, he will pay high tax whereas if a person is poor, i.e. his paying ability is low, he will pay less tax.

2. Canon of Certainty:
This canon states that the tax which an individual has to pay should be certain, not arbitrary. The tax payer should now in advance, how much he have to pay, on which date and at what place and time, so that he can make provisions and he will not face any kind of uncertainity.
3. Canon of Convenience:
This canon takes into consideration the interest of the individual, i.e. he is not facing any kind of difficulty in paying the tax. He can afford the amount of tax and in good position to pay the tax.

4. Canon of Economy:
Every tax has a cost of collection. This canon focus on minimum expenditure on the cost of collection the taxes. If cost of collection is equal or more than the tax revenue, then it will not be considered as a Good tax system.

5. Canon of Productivity:
According to this canon, the tax collect from different sources can be used as best as possible. It tax revenue yields good income, it is considered as a Productive tax and vice – versa.

● Revenue Sources of Public Revenue
1. Tax Revenue
2. Non-Tax Revenue
1.Tax Revenue : Tax revenue can be collected in two forms : Direct tax and Indirect tax.
i. Direct Tax : A direct tax is that tax whose burden is borne by the person on whom it is leveid. He cannot transfer the burden of the tax to some other person.
For example : The personal income tax is direct tax and its burden falls on the person who pays it to the government. ii. Indirect Tax : An indirect tax is that tax which is paid by one individual but the burden of which is borne by another individual. The person who pays the tax in the first instance transfers its burden on to the shoulders of another burden.
For example : Burger purchased from McD by a customer. Here, the customer is paying tax to the McD staff and they will pay the tax to the government.
2. Non-Tax Revenue : The income of government other than tax, is known as Non-Tax Revenue.
For example : Public enterprise, Railways and posts, RBI etc.

→ In the year, 2001-2002, the Tax Revenue collected during the Year was 1,33,532 Crore rupees and the Non-Tax Revenue collected was 67,774 Crore rupees and the total revenue collected was 2,01,306. So, Total Revenue collected from Tax Revenue was 66 % and Total Revenue collected from Non-Tax Revenue was 34 % .
→ In the year, 2010-2011, the Tax Revenue collected during the Year was 5,34,094 Crore rupees and the Non-Tax Revenue collected was 1,45,189 Crore rupees and the total revenue collected was 6,79,283. So, Total Revenue collected from Tax Revenue was 79 % and Total Revenue collected from Non-Tax Revenue was 21 % .
→ In the Year 2005-06, Revenue collected from Direct tax was 2,25,045 Crore rupees and Revenue Collected from Indirect tax was 2,48,467 Crore rupees and total revenue collected was 4,73,512 Crore rupees.
→ In the Year 2010-11 , Revenue collected from Direct tax was 4,22,508 Crore rupees and Revenue Collected from Indirect tax was 3,24,142 Crore rupees and total revenue collected was 7,46,650 Crore rupees.
→ In The year 2005-06, Revenue collected from Indirect taxes was 82,909 Crore rupees whereas in the year 2010-11, Revenue collected from Indirect taxes was 1,45,189 Crore rupees.
● Revenue collected from each sources is increasing day by day, as the income of individuals are rising and also the population is rising and several other factors too.
● The following are the good characteristics of a Good Tax system :
1. Multiplicity of Taxes : The main characteristics of Indian Tax structure is the multiplicity of taxes. Almost all types of taxes have been imposed in India, such as Income tax, wealth tax, gift tax, capital gains tax, death duty etc.
2. Based on Fundamental Principles : Almost all the principles have been included in the Indian tax structure.
3. Dominance of Indirect Taxes : It is estimated that more than 85% of taxes are collected through indirect taxes as against only 15% revenue from direct taxes.
4. Maximum Social Benefit : While devising Indian taxation policy, Government of India keeps in mind the objective of achiveing maximum social benefit. Indian taxation system is said to be as an instrument of attaining certain social objectives, e.g. as means of removing inequality of income etc.
5. Higher burden of Taxes on Urban Areas as compared to rural areas : Agriculture is the main source of income in rural areas and agriculture income is exempted in India. Hence there is higher burden of taxes on urban areas as compared to rural areas. [ Indian Taxation Enquiry Committee] (Source : Public Revenue, pg no. 592-593 )
Taxable Capacity : It refers to the maximum capacity of the people of the country to bear the burden of taxation without much hardship. It represents maximum limit to which the government can tax the people of the country.
●Taxable capacity is normally used into two senses;
(a)The absolute taxable capacity and
(b) The relative taxable capacity
(a) The absolute taxable capacity
The absolute taxable capacity indicates the amount of money or the proportion of national income that can be taken away by the government from people in the form of taxes without producing unfavourable effects. The concept of absolute taxable capacity is not to be assumed as a constant entity.
(b)The relative taxable capacity
In the relative sense, the reference is to the proportion in the two or more nations or groups of persons or states in a federation contribute towards the common expenditure through taxation. The relative taxable capacity refers to the proportion in which two or more community can contribute in the form of taxes in order to meet some common expenditure. In other words, relative taxable capacity of the community to contribute to some common expenditure in relations to the capacities of other communities.
● Factors Influencing Taxable Capacity :
1. Psychology of the tax payers : In case, the people are psychology depressed, the taxable capacity will be reduced automatically as they will not able to function their basic work which lead to failure of earning income and hence, they will not be able to pay adequate tax for the country.
2. Nature of Government : A democratic elected government by winning public sympathy and cooperation, is in position to raise more revenues from the people. The taxable capacity of the people is, thus, higher in a democratic country compared to a country ruled by a dictorial type of government. So, in order to collect huge taxes government have to behave normally to the citizens of the country.
3. Stability of Income : Stability of Income increases taxable capacity as it increases their purchasing power.
4. Administrative setup of the country : If a tax collecting machinery is efficient and the taxes are uniformly enforced, tax evasion can be avoided and can increases taxable capacity and hence leads to growth of our country.
5. Stability of Income : Taxable capacity of the country will be lower if there are economic fluctuations with serious ups and downs especially during the period of depression, but give huge amount of taxes in the period of boom.
● Problems of Justice in Taxation : Every person should bear the burden of the tax according to his ‘ability to pay’.
There are different theories of it are as follows :
1. Benefit theory of Taxation : According to this theory, every citizen should be called upon to pay the taxes in proportion to the benefits derived by him from services rendered by the government.
2. Cost of service Theory of Taxation : According to this theory, the government should tax the citizens in accordance with the cost of the services rendered by it.
3. Ability to Pay theories of Taxation : According to this theory, every citizen should pay the tax to meet the cost of government expenditure according to his ‘ability to pay’.
MEANING OF TAX INCIDENCE:
‘Tax Incidence’ refers to bearing the tax burden, i.e. money burden borne by the tax payer. We often come across the terms ‘impact’ and ‘incidence’ of tax. ‘Impact’ of the tax is endured by the person who pays the tax in the first place, i.e. ‘original tax’ burden. However, the ‘incidence’ of the tax falls on the one who finally bears the tax burden, i.e. ‘ultimate burden’.
The impact and incidence of tax may not necessarily fall on the same person. A producer (who is liable to pay excise duty to the state in the first place) charges a higher price from the customers. In other words, he is shifting the tax burden on his consumers. The customers bear the tax incidence and the producer bears the impact of tax.
‘Effect of taxation’ is another related subject with an entirely different meaning. The term is used in a wide aspect, as in the after effects of taxation other than bearing the money burden. For instance, taxation may lead to decline in savings and consumption, profit and productivity. It basically caters to all economic and non-economic activities.
Mrs. Ursula Hicks conceptualizes this phenomenon by bringing in two expressions- ‘Formal Incidence’ (burden borne by the tax payer) and ‘Effective Incidence’ (overall economic outcomes).
The government should fix the tax values keeping into consideration the socio-economic background of the population, i.e. the state should aim for maximum social advantage and social justice.
SHIFTING OF TAX:
The term refers to transferring the tax burden on other individuals. It is of two types-
(i) Single point shifting – A trader charging higher price from his consumers, thereby shifting the tax burden
(ii) Multi-point shifting – Layers of shifting the money burden of tax, i.e. shifting tax burden from one person to another to another. For example, from producer to wholesaler to consumers.
Tax payers pay the tax, but shift its burden on to others. However, there are some people who avoid paying taxes. This is called ‘Tax Evasion’, which is highly offensive and illegal.
Direction of Tax Shifting-
(i) Forward tax shifting – Shifting of commodity tax from producers to buyers.
(ii) Backward tax shifting – Rise in prices may decline demand of certain goods, due to which traders incur losses. Due to this, the trader pushes the producer to reduce the prices. So the now it’s the trader who faces the money burden of tax.
In general, goods with elastic demand tend to push the tax backward, whereas goods with elastic demand push the tax burden forward.
Forms of Shifting-
Shifting of tax by the dealer to consumers can be done in two ways: either by increasing prices or lowering the quality.
Quantum of Tax Shifting-
It refers to the magnitude or proportion of tax borne by the tax payer.
Money Burden & Real Burden-
‘Money burden’ refers to the part of income which the citizen are bound to pay and can not use that money for their personal consumption purposes.
‘Real burden’ on the other hand indicates the impact of taxation on economic welfare, i.e. people are spending, saving, consumption, production activity, etc.
THEORIES OF TAX INCIDENCE:
Three pivotal theories in the context of tax incidence have been found:
(i) Concentration Theory- This theory has been generated by the physiocrats of France, stating that the net burden of tax eventually falls on land-owning classes and that economic surplus helps the state extract out all the taxes. However, this theory was criticized on the grounds of calling agriculture as the sole source of economic surplus. It gave no credits to other sectors to be productive and beneficial for modern economic welfare.
(ii) Diffusion Theory- This theory was advocated by Mansfield and Canard, according to which tax incidence does not restrain to one person, rather it gets scattered throughout the economy through the process of tax shifting and re-shifting. The theory supports old taxes and indirect taxes because their burden keeps shifting, or has already dissolved in the economy, thereby not causing disturbances, whereas they do not prefer new taxes because they cause upheavals in the society. So, the two economists found it meaningless to study the theory of tax incidence.
The theory has however been rejected due to 4 main reasons:
The tax burden falls on every individual, irrespective of his ability to pay, which leads to discontentment among masses.
It is incorrect to ignore the theory of tax incidence, since the primary goal of the state is to look after state welfare, maximum social advantage and social justice.
Tax burden does not shift in the process of exchange, but only under certain specific conditions. Tax burden does not dissolve automatically in the economy that easily.
The theory the market to be under perfect competition, which is impractical.
(iii) Modern Theory- This theory deals with the importance of pricing and surplus. As per the theory, a person enjoying surplus can pay the tax from the same. A person who does not have surplus tends to shift tax burden on to others. However, shifting of tax is not feasible without any transaction, for which the good’s price plays a crucial role, which determines the good’s demand and supply. If prices rise, the burden is on the buyers; if prices fall, the burden is on the trader; and if the prices rise less than the magnitude of tax levied, the burden partially falls on both, the buyer and seller.
As per the theory, tax incidence is affected by the following factors:
Elasticity of demand and supply- If the demand of a good is elastic the tax burden falls on the trader himself as the consumers will stop purchasing that particular good if the trader increases the price (so as to shift the burden).
On the other hand, if the demand of a good is inelastic, the tax burden would fall on the consumers, as they would continue to buy the good, even if the producer increases the price.
Inelastic supply of goods indicates that the tax burden falls on the trader due to their perishable nature. If the supply elasticity is high, the tax burden falls on the consumers due to high bargaining power of the trader because of the good’s non-perishable nature.
Substitutes- If the government imposes tax on one good, the trader cannot pass on this burden to the buyers, or else, the consumer would shift to the substitute of that good.
Laws of production- In case of ‘Increasing returns to scale’, the price of the commodity goes up as the production declines and vice-versa. Pricing affects demand and supply of that good. The price rises more than the increase in tax. Such goods are favoured for public subsidies. In case of ‘Diminishing returns to scale’, the per-unit cost falls as the production declines. The price of the good rises less than the rise in tax. These goods are preferred for taxation. In ‘Constant returns to scale’, the cost of producing a good is not affected by the rise/fall in the total output.
Amount of taxation- If the magnitude of tax levied on the produce is low, the trader would not shift the tax burden. On the contrary, the trader would certainly shift the burden on to his customers if the tax burden is high.
Capital mobility- If mobility of capital is high, the trader would shift the tax burden on to the consumers. If the capital mobility is low, the trader bears the tax load all by himself.
INCIDENCE OF TAX ON MONOPOLY:
A monopolist aims to acquire maximum profit out of his total production, for which he increases his production till his MR=MC. The government levies taxes on him in two manners:
(i) Tax on monopolist’s profits- The government may tax the monopolist by either charging him a ‘lump sum’ or by collecting a fixed percentage of his profits from him. In either of the cases, he cannot shift the tax burden on his consumers, as even a little price rise may lead to him losing his share of market. This is because his products carried a fixed price which made him earn maximum revenue. In order to maintain his level of profits and evade his firm from shutting down, he would bear the burden of tax all by himself.
(ii) Tax on monopolist’s output- The state may charge the monopolist on the basis of his output. So, the monopolist would naturally charge a higher price from his customers. The extent of price depends on the following factors:
Demand and Supply elasticity- If the product’s demand is elastic, the tax burden falls on the monopolist. If the product’s demand is inelastic, the tax burden would be borne by the consumers. If the good’s supply is elastic, the tax burden falls on the consumers. This is because of the stronger bargaining power of the monopolist. If the supply is inelastic, the tax burden falls on the monopolist due to less bargaining power of the monopolistic firm.
Laws of production- Under increasing returns to scale, the price would rise due to imposition of tax, as imposing tax implied declined productivity, which automatically leads to rise in prices. The monopolist bears the tax burden by himself. In diminishing returns to scale, the production declines due to taxes, which lead to fall in prices, due to which, the monopolist shifts the burden of tax on the buyers.
INCIDENCE OF IMPORT-EXPORT TAXES:
Importing tax is paid by the importing country, as the demand for imported goods in the importing nation is inelastic. On the other hand, if the demand for imported good in the importing country is elastic or not intense, then the importing tax is levied on the exporting country.
Export tax is borne by the importing nation if its demand for the imported good is inelastic or very intense. Also, if the supply of the product is inelastic, then the export tax is paid by the exporting country. Mostly, the exporting nations bear the exporting tax.
INCIDENCE OF INCOME TAX:
Income tax, being direct taxes are borne by the citizens themselves. Its burden cannot be shifted. However, exceptions always exist. Some workers may demand higher wages along with tax free allowances and perks. Also, businessmen do not shift the tax burden onto their customers as there exists a high competition among them regarding sales. Most of them do not even pay income tax. Also, if they increase their prices, they may end up losing their share of market and incur losses. Moreover, a rise in prices will increase their total income, due to which they will have to pay more income tax than before. So, businessmen do not transfer the income tax’s burden on to the buyers.
INCIDENCE OF SALES TAX, PROFESSIONAL TAX, DEATH DUTY, LAND TAX and HOUSE TAX:
If the demand of the good is elastic, then the burden of Sales tax falls on the shoulders of the seller. If the demand is inelastic, then the burden of sales tax is borne by the sellers. In general, sales tax’s load is endured by the buyers or purchasers, so the tax is also known as ‘purchase tax’.
Professional tax levied by the state is a direct tax and is imposed on people engaged in some or the other profession. Its burden cannot be shifted as such. However, if in case the burden is too much on the payer, then he may shift its burden onto those who make use of his services.
Death duty is levied onto the property of the deceased person left behind. It is done in two forms. Wealth tax is imposed on the total wealth, property and assets. Inheritance tax is levied on some share of the wealth inherited.
Land tax can be collected by the state in three plausible ways, i.e. through rent on the land (which is an unearned income or surplus, burden of which falls on the landowner and cannot be shifted), or through rent on the capital invested. The tax burden falls on the landowner. The landowners tend to shift this tax burden on to the cultivators by charging them high rents. The tax may also be levied by the government on the production from land. Here, if the demand of the agricultural produce is elastic, the burden falls on cultivators; if the demand is inelastic, the burden falls on the consumers.
House tax burden also relies on the demand elasticity of houses. If the demand is elastic, or the supply of houses is greater than demand, then the burden of houses falls on the landlords. If the demand is inelastic, the landlords charge exorbitantly high rents due to shortage of houses. So eventually, the house tax burden will fall on the buyers.