Business Taxation

Quiz 1

Business Taxation

1. State briefly and concisely the nature of taxation.

• The nature of taxation is two-fold. One is being an inherent attribute of sovereignty which enables the government to fulfill its duties to society. The other is being legislative in character, thus, such power is imposed through the regulation of the law.

2. What is the underlying theory of taxation?  

• There are three underlying theories behind the power of taxation and one of which is the Lifeblood theory. Without taxation, the government will not operate wholly towards its responsibilities in the society because there will be no source of funds that will be used in order to provide such services. The other is the necessity theory. The power of taxation stems from the need of the state to have an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, and public goods that enjoyed by the people, all for the preservation of the sovereignty of the state. The last one is the benefits-protection or the reciprocity theory. It is said that the power of taxation is resulted from the exchange of the people and the government. The latter, which guaranties benefits and protection as the masses provide for the funds to be used.

3. Explain briefly. What are the three basic principles of a sound tax system? Explain each briefly.

• Such basic principles include fiscal adequacy. It means that the sources of funds in taxation must be sufficient to meet government expenditures and other demands. Second is the administrative feasibility. A sound tax system must be imposed effectively in order to provide services in an efficient manner. Third is the theoretical justice. This principle put taxation in such manner that the people should be taxed based on their capacity to pay, it is progressive in a way that as the income of the individual increases, amount of the tax also increases.

4. Distinguish tax from license fee.

• Tax is emanated from the power of taxation to generate revenue but a license fee is stemmed from the police power to enforce order within its territory. Taxation is progressive in manner and as the income of an individual increases, tax will always be based on the taxpayer’s income, thus, making the amount be unlimited. However, a license fee is limited to following attributes: cost of issuing the license and inspection and surveillance. The payment of tax is done after the income has been acquired and so it is made after the start of a business. A license fee on the other hand is paid before the acquisition of such in exchange to its costs of obtaining one. Non-payment of a license fee makes a business illegal but non-payment of tax makes one criminally liable.

5. Explain the sumptuary purpose of taxation. 

• The purpose of taxation is to raise revenue for the government to be able to provide public goods and services which enjoyed by the citizens. It promotes general welfare of the people, emphasizes the regulation of the law, reduces social inequality, encourages economic growth and preserves the sovereignty of the state.