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An investigative study of the pros and cons of custom duties as a source of government revenue on the Bahamian economy.

Free essay example:

An investigative study of the pros and cons of custom duties as a source of government revenue on the Bahamian economy.

A Research Paper

PRESENTED

IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE B.G.C.S.E ECONOMICS

Candidate Name: Cara Elexis Rolle

Candidate Number: 0052

School Name: St. Andrew’s School

Centre Number: 1908

Subject Name: Economics BGCSE

Date Submitted: Monday, March 15th, 2010


Table of Contents

Page

Introduction

3

Chapter 1 – “Taxation and the principles of taxation”

6

Chapter 2 – “The functions of taxation”

9

Chapter 3 – “The different methods of taxation”

11

Chapter 4 – “The different forms of taxation”

14

Chapter 5 – “The pros and cons of custom duties as a source of government revenue on the Bahamian economy”

17

Conclusion

19

Recommendation

22

Bibliography

23


Introduction

        At the beginning of every year, the members of parliament reconstruct the government`s budget. A ‘budget’, simply is a sum of money allocated for a specific reason. Similarly, a ‘government budget’ is “is a legal document that is often passed by the legislature, and approved by the chief executive-or president that is a general list of all planned expenses and revenues.”1 When creating a budget, the members of parliament take into account: the expected expenses for the year, unexpected events that could occur and which ministries and departments could be used to acquire government revenue.

Here, in the Bahamas, the industries that provide the main source of income are: Ministry of Tourism and Ministry of Banking and Finance. However, there are other minor areas in the public sector that also earns money for our country. For example, taxation is a source of revenue for our government. In this coursework, I will be carrying out “an investigative study of the pros and cons of custom duties as a source of government revenue on the Bahamian economy.”

        There are various forms of taxation that can be enforced by the government. However, in The Bahamas, the main form of taxation is tariffs. Most of the revenue that is obtained by the Bahamian government is collected through tourism, banking and tariffs. Tariffs, also known as custom duties are the main form of taxation imposed in The Bahamas.

 In this coursework my aims are to:

1. Examine taxation and the principles of taxation

2. Examine the functions of taxation

3. Examine the methods of taxation

4. Investigate the different forms of taxation

5. Investigate the pros and cons of custom duties as a source of government revenue on the Bahamian economy.

I chose this topic, so that I could better understand an area in the public sector that acquires government revenue. Also, by completing this coursework, I would be able to recognize the effect that this area in the public sector has on the Bahamian economy. I would also be able to understand other methods of taxation that is used in other countries and possibly recommend the implementation of other forms of taxation in the Bahamas.

To obtain information for my coursework, I plan to use both primary and secondary research. For primary research, I plan to interview someone working in the Ministry of Finance and distribute questionnaires to people in both the middle and upper class. This will help me to better understand how custom duties affect the Bahamian economy and people within the Bahamas. For secondary research, I plan to use economic and commerce textbooks and newspaper articles. The internet will be the main source that I use to acquire secondary research. I will use the internet to obtain information from the Ministry of Finance website and other websites that are relevant to this topic.


Chapter One

Examine taxation and the principles of taxation

“Taxation is revenue obtained from the imposition of taxes.” 2 Based upon this definition it can be inferred that, taxation is any form of compulsory payment that is imposed by the government and must be paid by an individual. This is usual a burden upon households, firms or individuals and creates excess expenses.

A government can collect taxes on three things: income, expenditure and wealth. Firstly, with regards to income, people are taxed on the returns from their investments. Examples of these are: salaries, rent, profits, wages and interest. Secondly, with expenditure, people are taxed on the total amount of goods and services that they consume. Similarly, taxation on wealth is taken on the total amount of material possessions or resources of a household.

Globally, there are laws in place that state that every taxpayer should be treated equally when paying taxes. However, considering the amount of money each individual makes, it would not be logical to make every taxpayer pay the same amount of tax. Over 200 years ago, an economist named Adam Smith stated the following four principles of taxation: “equality, certainty, convenience and economic.” 3 Today, these four principles of taxation along with three new principles are considered by a government when implementing taxation. The recently considered principles of taxation are: “adequacy, neutrality and broad basing.” 4

Firstly, there is “equality. This refers to taking into account the economic circumstances of each household and examining the amount of money that they are able to pay.

Secondly, there is “certainty. This simply means that it should be obvious what is expected to be paid by a household.

Thirdly, there is “convenience.When a government considers implementing taxation they make sure that it is not a hassle to pay your taxes. Therefore, facilities should be in place that can accompany the payments of taxation to a greatest extent and people that can help in the process of paying taxes.

Fourthly, taxes should be “economical. This means that, the collection of taxation should be cheaper than the amount of taxes that is being contributed.

Fifthly, there is “adequacy. Basically, the government should not use taxes to create a burden for its citizens. Taxes should only be used to obtain enough revenue to cover government expenses.

Sixthly, there is “neutrality. This means that the government should consider the different economic classes of the citizens within their country. Meaning that, taxes should not be an advantage to one group of people; they should not “interfere with or influence individual decisions-making. 5

Lastly, there is “broad basing. This is taxation on individuals given over a complete Bahamian economy “to minimize the individual tax burden. 6

Many of the principles of taxation are not acknowledged by the Bahamian government. For example, taxation in the Bahamas does not have to be paid by the majority of the population so, there is not “broad basing.”  Although the government of the Bahamas may not impose great tax, the taxes that are compulsory are used to obtain government revenue. The money that is acquired through taxation is then used to finance other areas of the government such as: health and education. By forcing taxations not only is government revenue obtained, the government can also take into account the amount of money that is spent regularly throughout a year.


Chapter Two

Examine the functions of taxation

        There are five functions of taxation: to raise revenue, to influence expenditure, to redistribute income, to maintain economic stability, and to satisfy specific objectives.

        Firstly, the government implements taxations to obtain revenue. Revenue is simply, money which is made by taxation (a profit). The money which is obtain through taxation the government uses to cover public expenditure such as: police, education, roads and medical care. These are services which privately owned enterprises are unwilling to provide for free.

        Secondly, taxes are used to influence expenditure. This means that, households would buy more locally and less from abroad if there was higher rate of taxation on imported goods (custom duties). Therefore, the government raises custom duties on imported goods so that their final market price would be at a price where home producers could compete with them.

        Thirdly, by imposing taxation there is more equality in the level of wealth within a country. By imposing a higher amount of taxation on more wealthy persons income and capital ownership, less wealthy people are given some money. By redistributing income, the government can positively influence he distribution of wealth and there can be a more stable an economy.

        Fourthly, the government uses taxation to maintain economic stability. Taxes can be used to control inflation because the government uses taxes to “level out the ‘highs’ and ‘lows’ of economic activity, to promote economic growth and try to achieve full employment.” 7

        Fifthly, taxes are used to satisfy specific objectives. The government may use taxes to discourage certain addictions such as: smoking, drinking and gambling. In The Bahamas, gambling for its citizens is illegal, however, smoking and drinking is not. When importing “fine cut tobacco, you are charged 210%.” 8 This is done to discourage people from importing cigarettes. Taxes can also be used to protect growing industries and home producers from foreign competition.


Chapter Three

Examine the different forms of taxation

In economics, there are two main types of taxation: indirect and direct taxation. G. F. Stanlake describes indirect taxes as, “taxes levied on spending” and direct taxes as, “taxes placed on income and wealth.” The main difference between these two different types of taxation is that, with direct taxation each household must “bear the burden of tax” whereas, with indirect taxation the household can “pass on all or part of the burden of the tax in form of higher prices.”

In the Bahamas, three forms of indirect taxes are imposed: custom duties, stamp duties and property tax.

Custom duties and exercise duties are taxes placed on goods that are imported. These range in prices depending on the value and amount of goods and whether the good is produced nationally.

Stamp duties are taxes paid on various monetary instruments. These are usually used with cheques, contracts, money orders, etc. In the Bahamas however, stamp duties may be imposed on a good in addition to custom duties. For example, “cigarettes have a 210% custom duty plus an additional 7% stamp duty.” 9

Property taxes are also imposed in the Bahamas. These are taxes placed on a household/on land owned by a household and us enforced by the government. However, not all owners of their own land must pay property tax. In the Bahamas, you are only taxed on your property if it has a value of $250, 000 and above. “If your property is worth $250, 000 then you pay ¾% of the market value of the property.” 10Respectively, “if your property is worth $500, 000 then you pay 1% of the market value of the property.” 11

The Bahamian government does not impose any forms of direct taxation on its residents and citizens. The main form of direct tax is income tax. Income tax is, tax placed on individuals’ “personal earned income” – such as their wages/salaries and rent. This method of taxation is considered both direct and progressive taxation.

It is evident that, The Bahamian government does not impose a large range of taxation on households and firms. Currently, The Bahamas is known as a tax haven because there is no compulsory direct taxation. In The Bahamas people are not taxed on capital gains (capital gains tax), corporate earnings (corporate earnings), personal incomes (income tax), sales, inheritance (inheritance tax) or dividends. However, although the Bahamas does not impose many common forms of taxation, they do impose stamp tax on imported goods.

Considering the absence of capital, corporate and income tax in the Bahamas, tariffs are the main form of taxation and main source of government revenue. Tariffs, also known as “custom duties,” are import duties levied on imported goods. In the Bahamas, 65% of its government revenue is acquired through tariffs. Though there is a range with the rate of taxation on imported goods, the general rate is 32%. The Bahamian government awards people within the Bahamas with various exemptions however so that the taxation is not a complete burden. During the year, all Bahamian citizens (12 years of older) are awarded 2 exemptions of $300. These exemptions can be used when clearing customs after returning from any country abroad once the goods that have been purchased are $300 or less. Also, since 2000 the government has eliminated custom duties on all computer hardware so that all youths would become more technical. Businesses have a separate form of taxation. They are taxed 7% on all of their imported goods and must also pay a business licensing fee which varies depending on their gross profit.


Chapter Four

Examine the different forms of taxation

According to G. F. Stanlake, a tax can take three different forms. They are: proportional, progressive and regressive.

Firstly, there are “proportional taxes.” These are usually made by corporations. Proportional taxes are “those which remain constant even as the amount subject to taxation increases.” Basically it means that, although a persons` income is increasing, the proportion of income taken for taxation will always remain the same. Below is a table that shows how proportional taxes being calculated in the country of New Zealand because our country, The Bahamas is not involved in this form of taxation.

Tax Benefits in New Zealand in 1997

Gross Income

Less 33%

Tax Benefit

Net Income

$100, 000

$67, 000

$3, 933

$70, 933

$40, 000

$26, 800

$3, 933

$30, 733

$34, 200

$22, 914

$3, 933

$26, 847

$0

$0

$0

$0

Figure 4.1: Tax benefits in New Zealand in 1997 (the proportional taxes scale) - single adult; no benefit except tax benefit

Secondly, there are “progressive taxes.” These forms of taxes are based upon the rate of income of a household. Those who make more money would pay a larger percentage of taxes whereas those whose incomes are low would pay a lower rate of income. For example, the table below shows the calculation of the “progressive tax system.”

Annual Income

% Tax Paid

$ Tax Paid

$20, 000

20

4, 000

$50, 000

40

20, 000

$80, 000

50

48, 000

Figure 4.2: How taxes would be calculated using the progressive tax system.

Lastly, there are “regressive taxes.” According to Stanlake, this form of taxation is the complete opposite of “progressive taxes.” Moreover, “regressive taxation is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.” Refer to ‘Figure 3’ to sight an example of regressive taxation.

Annual Income

% Tax Paid

$ Tax Paid

$20, 000

50

10, 000

$50, 000

40

20, 000

$80, 000

20

24, 000

Figure 4.3: How taxes would be calculated using the regressive tax system.

After examining the three forms of taxation, I think that The Bahamas should consider imposing this form of direct taxation as a source of obtaining government revenue because custom duties do not target all households, firms and individuals.


Chapter Five

Investigate the pros and cons of custom duties as a source of government revenue on the Bahamian economy

Custom duties have long been a source of government revenue in The Bahamas as compared to other countries in the world. While it’s a source of revenue it has both positive and negative effects on Bahamian economy.

Despite popular belief, custom duties or tariffs in The Bahamas are levied on imported goods as a source of government revenue. This form of taxation has its advantages and disadvantages.

There are many advantages that can be experienced by raising custom duties. Firstly, the government uses custom duties to raise the final market price of cheaper foreign goods to a level at which home producers can compete. In this way, Bahamians are encouraged to buy domestically rather than internationally because it’s cheaper and less of a hassle. Custom duties are also used to benefit the Bahamian economy. The government uses custom duties to raise government revenue and to seek to force a foreign country to change a policy.

Though custom duties are advantageous for Bahamians citizens and the Bahamian government alike, there are also some negative effects that can be experienced. With raising the price of custom duties, Bahamians would continue to travel but instead they would become untruthful with the amount of goods that they purchase and the government may experience a decrease in government revenue.  


Conclusion

My coursework was an “investigative study to find out the economic impact of custom duties on the Bahamian economy.” I chose five main aims which helped me to break down my research and display them in an effective and logical ways. After carrying out both primary and secondary research I mentioned in my introduction, I have obtained information on all three areas of my topic. I have explained each aim in detail with quotes and sources from both my primary and secondary sources of research. By completing my research, I learnt information about the Bahamian government and various other methods of taxation throughout the world.

My first aim was to examine taxation and the principles of taxation. I discovered that, taxation is any form of compulsory payment that must be made by an individual. Taxes may be collected on: income, expenditure and wealth. There are seven principles of taxation and they are: equality, certainty, convenience, economical, adequacy, neutrality and broad basing.

My second aim was to examine the functions of taxation.I discovered that there are five different functions of taxations. They are: to obtain revenue, to influence expenditure, to redistribute income, to maintain a stable economy and to satisfy specific objectives.

My third aim was to examine the methods of taxation. Through research I learned, there are two main methods of taxation and they are direct taxation and indirect taxation. They are different because direct taxation is “taxes levied on spending” whereas indirect taxation is “taxes levied on income and wealth.” The main types of taxation are: income tax, rates and property tax, stamp duties, general consumption tax, customs and exercise duties tax and purchase/sales tax. The main function of taxation is to obtain government revenue. Similarly, a tax can take three forms and they are: proportional, progressive and regressive.

My fourth aim was to examine the different forms of taxation. There are three different forms of taxation. They are: proportional, progressive and regressive. Proportional taxes are, “those which remain constant even as the amount subject to taxation increases.” Progressive taxes are, any tax in which the rate increases as the amount subject to taxation increases.” Regressive taxes are, “taxes imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.”

My fourth aim was to investigate the pros and cons of custom duties as source of government revenue on the Bahamian economy. This chapter reviews the many pros and cons of custom duties. The main advantage of custom duties is; home producers make more money because people and inspired to buy domestically. The main disadvantage is that: the Bahamian government can lose a great amount of government revenue by raising the rate of custom duties because people would become untruthful and would not pay anything at all.

Generally, the only problem I faced in my coursework was gathering information. It was challenging trying to get in contact with someone at the Ministry of Finance that could talk to me about taxation in the Bahamas. This led to me completely removing my fourth aim. Now that I have completed my coursework, I am generally pleased with the amount of information I have learnt. In conclusion, though I was not so fond of this topic at first, I`m happy I completed this because I can now fully understand the reason I must pass through customs every time I come back from away.


Recommendation

Currently, not only is our country in debt, but there is a large amount of unemployment and corruption. According to Bahamas Press, as of January 1st, 2009 the Bahamas is reportedly over 3 billion dollars in debt.

Considering this, the Bahamian government needs to do something to acquire government revenue. Though, the Bahamas does impose so forms of taxation, the types of taxes that are imposed do not target all citizens. Therefore, the government must either implement another form of taxation or focus on expanding a primary industry to obtain government revenue from.

In my opinion, after completing such research on taxation in the Bahamas and the effect that custom duty has on the Bahamian economy, I believe that the government should implement income and purchase tax. If this was to happen, every individual in The Bahamas, whether they are a citizen, resident or visitor, would be taxed. Bahamians would not be able to complain about this because when they travel to the United States, which a large amount of Bahamians do yearly, they are forced to pay taxes and custom duties on imported goods and they do not complain.


Bibliography

  1. “Definiton – Taxation.” Business Online Dictionary.

Retrieved: January 2010

From: <http://www.businessdictionary.com/definition/taxation-principles.html>

  1. “Definiton – Taxation.” Merriam Webster Online Dictionary.

Retrieved: January 2010

From: <http://www.merriam-webster.com/dictionary/taxation>

  1. Hall, D.; Raffo, C.; Chambers, I. & Jones, R. (2004). Business Studies Third Edition. China: Caroline Waring-Collins, Waring Collins Ltd.
  1. Stanlake, GF. Starting Economics. Singapore: Longman, 2003. Print.
  1. “Taxes in the Bahamas.” Bahamas Guide.

Retrieved: January 2010

 From: <http://www.thebahamasguide.com/business/taxes.html>

  1. “Bahamas Taxes.” Glorious Bahamas

Retrieved: January 2010 From: < http://www.gloriousbahamas.com/taxes.html>

  1. “US Taxation.” The Lowtax Network. (2009)

Retrieved: January 2010 From: <http://www.ustaxnetwork.com/>

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