Taxes are good ways for financing the costs of public goods, a special group of goods whose consumption by one person does not decrease the consumption by others and, at the same time, for which it is costly or impossible to prevent consumption (e.g. street lightening). A normal pricing for these goods would arrive to a zero-level price; thus, it would provide no incentives to supply.
Similarly, it is common to finance by taxes the costs of goods and services having large positive externalities if they are not supplied enough by the private sector.
Taxes are mandatory payments, ruled by laws. Tax revenue is collected from the whole society with differentiated intensity, inspired by considerations of justice, efficiency and effectiveness.
In particular, the tax system can have the broad goal of reducing income inequality.
Many fiscal system, however, are highly irrational, exceedingly complex and the taxpayer risks to need a professional advice for computing the tax amount and for figuring out ways to decrease the tax burden. Reaction to taxation can shape electoral behaviour.
The tax revenue is the sum of the revenues of different kind of taxes, depending on what is taxed:
1. the revenue of physical and juridical persons ("direct taxes");
2. wealth and assets as real estates and houses;
3. the domestic economic transactions ("indirect taxes" - e.g. VAT);
4. international trade, typically through import duties;
5. financial transactions, both in domestic and in international terms.
Tax revenue is the result of the application of a tax rate to a tax base.
Taxes are ranked according to the tax rate:
1. progressive taxes, with a tax percentage rate growing with the amount taxed;
2. proportional taxes, with a tax rate constant whatever the tax base;
3. regressive taxes, with falling tax rate whilst increasing base;
4. lump sum taxes, with a fixed absolute value of the tax, irrespective of the tax base.
Thus, the income distribution and tax base dynamics are key determinants for the revenue from progressive, proportional and regressive taxes, whereas it becomes irrelevant for lump sum taxes.
Fiscal systems differ a lot throughout the world but usually the personal revenue tax is progressive, the firm revenue tax is proportional as well as the taxation of domestic and international economic activity. Also wealth taxation is usually proportional, with some use of lump sums.
Lump sums are particularly common for taxes of a small absolute value.
In macroeconomic terms, GDP dynamics is a major determinant of tax revenue. The higher the GDP, the larger the tax base, the higher the tax revenue.
International competition across fiscal systems can hinder the possibility for a state to tax mobile items, whereas providing a strong incentive to international coordination (e.g. against tax havens).
Fiscal systems differs in terms of transparency, simplicity, use of threshold for exemptions, ways to deduct bills, etc. to the effect that, in certain countries, the work of tax accountants is very important for final effective taxation.
An automatic increase of tax revenue generated by a larger tax base is welcomed to the public balance, reducing the deficit or even producing a surplus.
Higher taxation on specific items could be a disincentive for related behaviours. This can give rise to a specific set of taxes purposefully aimed at reducing those behaviours, as in the case of cigarettes. A careful mix of tax and transfer can exert a powerful impact on the diffusion of an innovation, as with the case of a PRODINT: pro-diffusion-of-innovation tax.
Certain social groups can be hurt by taxation (both in total level and through specifical hideous taxes, especially if recently introduced) to the effect of changing their electoral behaviour and support anti-tax parties and policymakers. For instance, property taxes unrelated to income may impact low-income homeowners.
Wherever the State plays an important role in the country development and it supplies education, healthcare, social assistance, the tax revenue is proportionally high.
Where the tax revenue has not been covering the public expenditure, the burden of the public deficit has cumulated leading to the public debt, on which the state has to pay interests, in some extreme cases triggering a vicious cycle.
The tax revenue has been increasing for most of the 20th century, with its percentage on GDP reaching a ceiling and then falling, due to fiscal protests.
Linked to GDP dynamics as it is, the tax revenue is pro-cyclical. In recessions, tax revenues fall because of narrower base - and possibly because of tax rate cuts made by the government in name of stimulating the economy. In booms, tax revenues rise because of larger base, and possibly because of higher tax rate introduced to reduce the public deficit (which usually soared because of the previous free-falling tax revenues and possibly of public expenditure increases made to stimulate the economy).
During the business cycle, taxes may act as automatic stabilisers, having an elasticity to GDP changes often larger than one, i.e. with an over-reaction to changes in GDP, which in turn makes the disposable income fluctuate less than GDP.
By contrast, many taxes takes for reference the previous year tax base, as with the case of income taxes. This means that a one-year lag may characterise the overall tax revenue and thus, in certain occasions, be destabilising.
Many sub-Saharan African countries face difficulty in raising tax revenue for public purposes. Low per capita incomes, an economic base in subsistence agriculture, poorly structured tax systems, and weak tax and customs administrations all contribute to difficulties in raising tax revenues. This study uses panel data on 43 sub-Saharan African countries to measure the determinants of the tax share in GDP