Tax revenue

Tax revenue is the income that is gained by governments through taxation. Taxation is the primary source of income for a state. Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural resources and/or foreign aid. An inefficient collection of taxes is greater in countries characterized by poverty, a large agricultural sector and large amounts of foreign aid. Tax revenue is the income that is gained by governments through taxation. Taxation is the primary source of income for a state. Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural resources and/or foreign aid. An inefficient collection of taxes is greater in countries characterized by poverty, a large agricultural sector and large amounts of foreign aid. Just as there are different types of tax, the form in which tax revenue is collected also differs; furthermore, the agency that collects the tax may not be part of central government, but may be a third party licensed to collect tax which they themselves will use. For example, in the UK, the Driver and Vehicle Licensing Agency (DVLA) collects vehicle excise duty, which is then passed onto HM Treasury. Tax revenues on purchases come in two forms: 'tax' itself is a percentage of the price added to the purchase (such as sales tax in U.S. states, or VAT in the UK), while 'duties' are a fixed amount added to the purchase price (e.g., for cigarettes). In order to calculate the total tax raised from these sales, we must work out the effective tax rate multiplied by the quantity supplied. Taxation is a key task in any country as it advances state capacity and accountability. Charles Tilly identifies taxation as a form of extraction that allows the state to execute its primary functions: public policies (education, infrastructures, health care), state making, and protection. Taxation became indispensable in western Europe, when countries needed to fund wars in order to survive. This European model was later exported all around the world. Today, the level of taxation is used as an indicator of state capacity. Developed countries raise more taxes and therefore are able to provide better services. At the same time, the high taxation forces them to become accountable with their citizens, which strengthens the democracy. The effect of a change in taxation level on total tax revenue depends on the good being investigated, and in particular on its price elasticity of demand. Where goods have a low elasticity of demand (they are price inelastic), an increase in tax or duty will lead to a small decrease in demand—not enough to offset the higher tax raised from each unit. Overall tax revenue will therefore rise. Conversely, for price-elastic goods, an increase in tax rate or duty would lead to a fall in tax revenue. The Laffer curve theorises that, even for price-inelastic goods (such as addictive necessary items), there will be a tax revenue maximising point, beyond which total tax revenue will fall as taxes increase. This may be due to: The Laffer curve, however, is not universally accepted; Paul Krugman referred to it as 'junk economics'. A limiting factor in determining the government budget is the capacity to tax. Per capita income (PCI) is the most often used measure of relative fiscal capacity. But this measure fails to base tax capacity computation on other important tax bases like the sales and property tax and corporate income taxes. A representative tax system should assess the level of personal income, the value of retail sales and the value of property to compute fiscal capacity. To do so the average tax rate for each base is computed by dividing the total revenue derived by the total value of the base. Thus, as an example, income taxes collected would be divided by total income to yield a rate of taxation. The averages of each tax base can be used in comparison to other states or communities, that is, the average of other states or communities, to determine whether or not a government compares favorably regionally or nationally. A state or community's standing on these various bases may affect its ability to attract new industry. The resulting rates, high or low in comparison, can become targets for change. The mission of revenue administration is to provide prudent and innovative revenue, investment and risk management and to regulate the use of government capital.