Government Income
Exemptions Certain bodies, such as non-profit-making institutions, are exempt from tax – this means they do not pay any tax as long as they do not make any profit (over and above that which is used to run the organisation and including that which is earned for capital expenditure such as buying a new building, for example). Salaries and pensions earned by heads of state, former heads of state, war veterans, etc. are also exempt from taxation. Interest earned from certain investments are also exempt.
Incentives Te government of the day might decide to use fiscal policy (see more in Module 3 p.50) to stimulate the economy and growth. It is possible that special exemptions are used to promote economic development: these might include, exemptions to exporters; industries which take part in decentralisation activities, and training.
Of course the above depends very much on the fiscal policy of any government which is directly influenced by the overall political policy of the time. It might also change from year to year. Tis, more than anything else, is why the annual budget is so important – it gives an insight into the policy of the government itself.
General Aims of Taxation
Source of Income Generally speaking, there is only one aim with taxation: to gather enough money to pay for services expected by the citizens of a country. It is not true to say, however, that taxation is the only source of income, as mentioned in the first paragraph. Governments may also derive income from grants, donations and loans. While one talks of different sources such as income tax, import duty, etc. in reality there is only one source – the taxpayer.
Economic Regulatory Function A government may also, however, use taxation in order to “cool” down the economy; by taking away more from people, citizens have less to spend and this has the effect of regulating the economy, generally by lowering inflation – when spending declines, inflation nearly always drops also.
Redistribution of Wealth Whatever the aim of a government may be, a third effect takes place which may or may not necessarily be an aim – the redistribution of wealth. Whether people like it or not, more tax is taken from some than from others. One might be tempted to say that this is because they earn more; however, it is also a fact that in most countries, the more one earns, the higher the rate of taxation becomes – this means that someone earning about R30 000 p.a. will not pay tax on their salary in income tax (excluding excise duty or vat), while someone earning R1 000 000 p.a. will have to pay approx. 33% of their income in taxation.
Tis means that whenever this system of taxation is employed, which has always been the case in South Africa, redistribution of wealth automatically takes place. A low-income earner will enjoy the same protection from the defence force or benefit from medical services, having paid a smaller percentage of his/her income than a wealthier person (see also Module 6, p.97).
General Characteristics of Tax
Taxation is Compulsory Few people would pay tax unless it was compulsory. Collective services cannot be delivered or allocated through a process of charging for them. Remember also that citizens cannot be excluded from benefiting from them – think of parks, defence, etc. Taxpayers are therefore obliged to pay for collective services, whether they benefit from them or not.
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