The meaning of “taxation” and “tax”

These two words are often misused in Kenya. This is the case especially with regard to the word “tax” and its derivatives. Kenyans complain about being ‘taxed’ by the county governments, police, companies, other businesses, etc. For the sake of my readers, the best way to start blogging is by explaining the meaning of these two terms, which are pertinent to the subject of this blog. Let us find out if Kenyans have been using the words correctly.  

Taxation

The word taxation has two meanings. It can be understood to refer to the imposition of taxes. It also refers to an area of study in Public Finance which is concerned with the raising of government revenue. Public Finance is a branch of Economics which deals with government revenue and expenditure. As an area of study, Taxation is therefore a sub-branch of Economics.

Tax

This word is the least understood and most misused even by people who claim to understand and teach the subject of Taxation. An internet search reveals that the word has been defined in different ways by online dictionaries. The following are some of the definitions:

“A charge usually of money imposed by authority on persons or property for public purposes.” Miriam-Webster Dictionary

“Compulsory monetary contribution to the state’s revenue, assessed and imposed by a government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc., of individuals and organizations.” BusinessDictionary.com

“A contribution for the support of a government required of persons, groups, or businesses within the domain of that government.” The Free Dictionary

Of the three, I favour the definition by BusinessDictionary.com. It is wide enough to cover items on which taxes are imposed and identifies the nature of a tax. However, it leaves out one essential character of taxes.

For a contribution to the government to be considered a tax, it must have two characteristics:

1.      It must be compulsory. A tax is a coerced payment. One does not have the choice of whether to pay or not. Failure to pay can result in criminal sanctions such as imprisonment or a fine or both.

2.      It must be paid for no direct reward. The government does not directly give anything in consideration of payment of tax. One can only expect to benefit from the activities which the government spends the funds raised on. If one gets a direct reward for making a payment to the government, that payment is not a tax.

These two characteristics distinguish taxes from other payments made to the government such as fees, charges and prices which are paid for goods and services. For instance licence fees are paid for various licences which are issued by the government.  A person pays the fee and receives a licence in return. The word fee is used mainly where services are involved. Prices are paid when the government is engaged in the sale of goods. However, dictionaries identify the words fee, charge and price as being synonymous.

Another importance characteristic of taxes is that they are imposed by the government and not by anyone else. A private entity cannot levy taxes. If anyone other than the government imposes a compulsory payment for no direct benefit, that person cannot be said to be taxing but extorting or robbing. In Kenya, both the national and county governments have the power to impose and collect taxes.

Taxes are imposed with the object of raising revenue to finance public expenditure. This is the principal reason for imposition of taxes. Public expenditure refers to expenditure on, among others, the following by the government:

1.      Provision of education, healthcare, security, public sanitation, etc;

2.      National defence (defence of the territory);

3.      Construction of roads, power stations, etc.

4.      Maintenance of law and order

Other purposes of taxation

There are other reasons (apart from raising revenue) for imposition of taxes by the government. These reasons are secondary and are less important especially considering that they can be achieved using other means. These secondary purposes of taxation include:

1.      Redistributing wealth so that most of the wealth in country is not highly concentrated in the hands of a few members of the society while the rest have close to nothing.

2.      Managing inflation mainly during periods of demand pull inflation

3.      Allocating resources in the hands of the private sector

4.      Protecting the lifeline of a country

5.      Promoting infant industries from unhealthy competition

Types of taxes

Taxes may be categorised as being:

a)      Direct or indirect

b)      Revenue or capital   

c)      Progressive, regressive or proportional