On what is the tax which local government authorities collect based

WHAT ARE TAXES?

Taxes are a compulsory financial contribution by a person or body of persons towards the expenditure of a public authority. In modem economies taxes are the most important source of government revenues. Taxes on income (i.e. on wages, salaries, profits, dividends, rent and interest) and on capital are known as «direct» taxes. Taxes on commodities or services are known as «indirect» taxes.

Taxes are considered to have three functions:

(a) fiscal or budgetary, to cover government expenditure, to provide the public authorities with the revenue required for meeting the cost of defence, social services, interest payments on the national debt, municipal services, etc.;

(b) economic, to give effect to economic policy, to promote stable economic growth, to influence the rate of economic growth of the nation;

(c) social, to increase the economic welfare of the community, to lessen inequalities in the distribution of income and wealth.

Businesses and individuals are subject to many forms of taxes. The various forms of business organisation are not taxed equally. The tax situation is simplest for proprietorships and most partnerships; corporations or companies are treated differently.

In the United States of America nearly all of the federal government’s revenues come from taxes. By far the most important source of tax revenue is the personal income tax. Gross receipts from corporate income taxes yield a far smaller percentage of total federal receipts. Individual states levy their own taxes. As a result, for example, the profits of a corporation are liable to federal and sometimes state corporate income taxes. This often imposes a double tax burden. When the after-tax income is paid out to stock-holders as dividends, it is then taxed again as personal income.

In the United Kingdom there is no single code of tax law, the body of tax legislation being increased by each year’s Finance Act. 1

The United Kingdom operates a «schedular» system, 2 whereby taxable income from different sources is calculated and taxed under the rules of a particular «schedule».

Tax assessments are normally based on returns issued by the Board of Inland Revenue (referred to simply as «Inland Revenue») for completion by the taxpayer. While companies may receive tax returns, they normally submit instead a copy of their annual accounts together with a computation of taxable profits.

The United Kingdom does not yet operate a system of self-assessment for tax on income and capital gains, but it is being introduced at the moment.

Under Russian law, all Russian legal entities, whether they have foreign investment or not, are subject to the profit tax law. Foreign entities that have a taxable permanent establishment in Russia are also taxed under this law.

Russian taxes provide revenue for three tiers of the budget: federal, regional and local. The major taxes paid to the budget are: Profit tax; Value-added tax (VAT); Securities tax; Withholding tax. The Russian government tries to create a climate in which business can thrive, to keep the tax burden as low as possible. It also attempts to eliminate tax allowances, which deprive the budget of tax revenues, and to improve tax collection.

Tax returns for Russian legal entities are audited by the tax authorities at the time they are submitted.

If the company or a person assessed believes the assessment is incorrect in any way, an appeal may be lodged against it. The appropriate financial organ is required by law to reply to such an appeal within five days.

When a company resident in one country receives income or gains from a source in another, or when shareholders and company are domiciled in different countries it is possible that incomes arising will be taxable in each country, i.e. taxed twice. Many countries seek to mitigate the potentially harmful effects of double taxation by entering with other countries into double tax treaties, or arrangements preventing the same income being taxed twice.

A number of countries have problems because of significant taxpayer non-compliance.

Along with cases of illegal evasion of tax obligations there are entirely legal ways of avoidance by which a person may so arrange his affairs as to minimise, or even eliminate, tax liability on his property and income.

Notes

Taxation

Taxation is, by and large, the most important source of government revenue in nearly all countries. According to the most recent estimates from the International Centre for Tax and Development, total tax revenues account for more than 80% of total government revenue in about half of the countries in the world – and more than 50% in almost every country.

We begin this entry by providing an overview of historical changes in taxation patterns, and then move on to an analysis of available data from the last couple of decades, discussing recent trends and patterns in taxation around the world.

From a historical perspective, the growth of governments and the extent to which they are able to collect revenues from their citizens, is a striking economic feature of the last two centuries. The available long-run data shows that in the process of development, states have increased the levels of taxation, while at the same time changing the patterns of taxation, mainly by providing an increasing emphasis on broader tax bases.

Taxation patterns around the world today reveal large cross-country differences, especially between developed and developing countries. In particular, developed countries today collect a much larger share of their national output in taxes than do developing countries; and they tend to rely more on income taxation to do so. Developing countries, in contrast, rely more heavily on trade taxes, as well as taxes on consumption.

Moreover, the data shows that developed countries actually collect much higher tax revenue than developing countries despite comparable statutory taxation rates, even after controlling for underlying differences in economic activity. This suggests that cross-country heterogeneity in fiscal capacity is largely determined by differences in compliance and efficiency of tax collection mechanisms. Both of these factors seem to be affected by the strength of political institutions.

In the last part of this entry we provide an overview of empirical evidence regarding the equity and efficiency implications of taxation. In particular, we show that taxation does have a powerful redistributive effect, but it is important to consider how taxation also affects behavior of individuals, by changing economic incentives. For example, recent studies have found that taxation may lead to efficiency losses by inducing migration of ‘super stars’. These potential efficiency losses highlight the importance of designing taxation systems that achieve redistributive objectives at the smallest possible cost.

All our interactive charts on Taxation

The State of State (and Local) Tax Policy

What are the sources of revenue for local governments?

State and Local Revenues

What are the sources of revenue for local governments?

Local government revenue comes from property, sales, and other taxes; charges and fees; and transfers from federal and state governments. Taxes accounted for 42 percent of local general revenue in 2017.

Local governments include county governments, municipalities, townships, special districts (such as water and sewage authorities), and school districts.

INTERGOVERNMENTAL TRANSFERS

Local governments received about 32 percent of their general revenue from state government transfers (including indirect federal funds) and 4 percent directly from the federal government. Transfers for education programs account for over two-thirds of state government transfers to localities. Meanwhile, housing-program transfers are about 40 percent of federal transfers to local governments.

OWN-SOURCE REVENUE

CHANGING SOURCES

Since 1977, the share of local general revenue from taxes has remained steady at about 40 percent. However, the composition of tax revenue has changed somewhat. The contribution of property taxes to general revenue declined from 34 percent in 1977 to 30 percent in 1979, fell to a low of 27 percent in 2000, then returned to 30 percent in recent years. Meanwhile, revenue from sales taxes steadily increased from 5 percent to 7 percent between 1977 to 2017 (figure 2).

The share from intergovernmental transfers also fluctuated somewhat over time, falling from 43 percent of general revenue in 1977 to 36 percent in 2017. Revenue from charges, fees, and miscellaneous sources increased from 15 percent to 23 percent in 1985 and has remained roughly at that level since then (figure 2).

LONG-TERM REVENUE GROWTH

Although local government revenue was about the same relative to gross domestic product in 1977 (8.6 percent) and 2017 (8.7 percent), it has fluctuated over the period (figure 3). The percentage fell to a low of 8.0 percent in 1984 and peaked at 9.9 percent in 2009.

Much of the change in local government revenue relative to the economy resulted from increasing and decreasing transfers from federal and state governments. Transfers fell from 1977 through most of the 1980s but increased slowly though the 1990s. This source of revenue is mostly cyclical; it grew sharply during the 2001 and the 2007–09 recessions, receding in both cases as the economy recovered (figure 4).

Updated May 2020

US Census Bureau. Annual Survey of State and Local Government Finances.

———. Census of Governments, vol. 4, Government Finances.

Randall, Megan, Tracy Gordon, Solomon Greene, and Erin Huffer. 2018. «Follow the Money: How to Track Federal Funding to Local Governments.» Washington DC: Urban Institute.

Gordon, Tracy. 2018. “Predicting Municipal Fiscal Distress: Aspiration or Reality?” Cambridge, MA: Lincoln Institute of Land Policy.

Local Tax

What Is a Local Tax?

A local tax is an assessment by a state, county, or municipality to fund public services ranging from education to garbage collection and sewer maintenance. Local taxes come in many forms, from property taxes and payroll taxes to sales taxes and licensing fees. They can vary widely from one jurisdiction to the next.

Taxes levied by cities and towns are also referred to as municipal taxes.

Understanding Local Tax

The U.S. Constitution gives the federal government the authority, and the states the right, to impose taxes on their residents. 

Local taxes fund government services including police and fire services, education and health services, libraries, road maintenance, and other programs and projects which benefit the community at large. Many of these services also receive federal funds in the form of grants.

State, county, and municipal taxes may be referred to as local taxes, as opposed to federal taxes.

Key Takeaways

Unlike federal taxes, the benefits arising from local taxes are generally apparent at the community level. Municipalities face a constant balancing act with regards to levying local taxes, since high taxes meet with resistance while low taxes lead to cutbacks in essential services.

Among the common types of taxes that many states impose are personal income tax, corporate income tax, estate tax, fuel tax, and sales tax.

Types of Local Taxes

The Property Tax

The largest single tax bill that is received by most people is the local residential property tax imposed on homeowners. This is generally based on the assessed value of the home.

Each state establishes the guidelines under which local governments can impose property taxes.

Miscellaneous Local Taxes

States and cities that impose a local income tax withhold the tax from employee wages. Local wage taxes are relatively rare. A total of 16 states permit them. In addition, Ohio and Pennsylvania impose local levies known as school district taxes to help fund education costs.

A sales tax is imposed on goods and services sold to residents of a state or municipality. This is known as a regressive tax rather than a progressive tax because every customer pays the same percentage regardless of income.

Education, public safety, and road maintenance are among the priorities of local governments.

All but five states have sales taxes (Alaska, Delaware, Montana, New Hampshire, and Oregon). Many have complex sales tax laws that exclude some goods like food and reduce the percentage charged on others, such as cars. A number of states impose higher «sin taxes» on cigarettes and liquor.

In some states, a smaller city tax may be added to the state tax. Many states also have a use tax, which is due on major items purchased outside of the state, most notably vehicles.

Other Government Funding Sources

Municipal authorities typically issue bonds to fund some capital projects in the community.

Investors who purchase municipal bonds are lending money to the government which promises to repay a set amount of interest and repay the principal on a future date.

To service the debt, that is, to fulfill interest and principal repayment obligations on the bonds, a municipal government may issue a new tax or raise existing local taxes.

Match the words (1-4) with their definitions (A-D).

1 HMRC A A court of the law, at the federal or state

level, that deals with tax disputes in the US.

On the federal level the court hears cases

between taxpayers and the Internal Revenue

Service (IRS). The court is a part of the

legislative branch of the federal government,

not the judicial branch.

2 Tax Court B Any government entity that is authorized by

law to assess, levy and collect taxes.

3 Tax authority C The U.S. government agency authorized to

collect federal income taxes and enforce the

tax laws embodied in the IRS Code

4 Internal Revenue D A non-ministerial department of the UK

Service Government responsible for the collection

of taxes, the payment of some forms of state

support and the administration of other

regulatory regimes including the national

Exercise 8.

Complete these sentences using the following words.

tax authority obtained value added tax software incentives

business parameters limitations import deductions

1. Congress and the Internal Revenue Service have laid down certain ___________ that an organization must follow in order to qualify as a nonprofit corporation.

2. A foreign company is __________ to register with the tax authorities within 30 days after start of business activities in Russia through a separate subdivision.

3. If you want to buy a lot of products you must know what the ________ will be on it.

4. A corporation is viewed as a completely separate tax entity in the Internal Revenue Service’s eyes, so your business can take tax _________ just as an individual would.

6. At this stage you can obtain a Tax Identification Number from the Internal Revenue Service, as well as from your state’s ___________.

7. A company carrying out commercial activities in Russia in the absence of tax registration may be penalized in the amount of 10 percent of income __________ from such activities, but not less than 40,000 Rubles.

8. A separate VAT return should be submitted in respect of the _______ goods by a Russian company from another country in the Customs Union between Russia, Belorussia and Kazakhstan.

9. The people were subject to the value added tax which was to be expected as the state deserves some share of the ___________ transactions.

10. VAT on representation expenses and on business trips can be recovered within the established limits. No other _________ exist.

11. There are VAT incentives for small businesses with revenue less than 2 mln Rub within 3 months or that apply special tax regimes. Also, there are VAT ___________ for participants of R&D and commercialization project in Skolkovo innovation centre.

12. Last week, the state reported that tax collections are up 11.5% for this ________ year.

UNIT EXTENSION

Exercise 9. Two-minute presentation.

Choose one of the following subjects about VAT collection and prepare to give a two-minute presentation about it to the group.

· VAT collection – the Basics

· Problems of VAT collection

· Efficiency of VAT collection in Russia

· Rates and registration for VAT

· Could banks become VAT collection agents?

· VAT collection and Social Security contribution: is there a link?

· International transactions and foreign traders for VAT

· VAT in developing and transitional countries

PART 2

TOPIC FOCUS: Capital Gains Tax

Discuss these questions with a partner.

1. What are different ways in which companies can earn money?

2. What is ‘disposal of assets’?

3. What are capital assets?

4. Why do governments impose Excise Taxes?

5. What form of taxation do governments use to protect domestic products?

A company or individual can generate income in a number of ways – through sales of merchandise, provision of services, renting property, trading securities or lending money to other enterprises. In addition to its core activities, a company can also earn income through disposal of assets other than inventory, or capital assets.The profit made by the sale of capital asset is called capital gain. The tax levied on profit which is a result of sale of capital asset is called Capital Gains Tax.

Capital Gains Tax is levied when a taxpayer disposes of an asset that is worth more on disposal than when it was acquired. The most common capital gains are realized from the sale of stocks, bonds, land, property and business assets such as goodwill.

The amount of Capital Gains Tax is computed by deducting the acquisition costs of an asset and enhancement expenditurefrom the consideration (or sale proceeds) received from a disposal.

Not every increase in price of assets held by a company or individual results in tax liability. If the price of security held by a company increases, but the company decides not to sell, the gain is not realised and, therefore, nor subject to taxation. Capital Gains Tax are only triggeredwhen an asset is realised, not while it is held by a company or individual. An entity can own shares that appreciateevery year, but still not be liable for paying Capital Gains Tax on the shares until they are sold.

However, the price of securities or property does not always go up. When the price of securities goes down, a company or individual that holds securities incurs losses. Capital losses are then used to offset capital gains of the same type in order to reduce a company’s tax liability. If the losses exceed the gains of the same year, the excess amount may be carried forward against the gains of later years.