EFFECT OF DOMESTIC REVENUE GAP ON BUDGET DEFICIT AND DEBT BURDEN: EVIDENCE FROM GHANA
Background of the study
Tax is a core apparatus in the hands of the government to fulfil expenditures and it helps in attaining sustained growth objectives. Tax can be defined as the charge levied by the government of a country upon its habitants for its provision or for the purpose of facilitating the public of that country. It is neither a voluntary payment by the tax payer nor like a gift, rather it is an enforced payment to the government. On non-payment of it, the tax payer will be punishable by law. The purpose of taxes is to create welfare for the society by providing public services, protection to properties, defence expenses and economic infrastructure. There are four main drives of taxation which are revenue (collect a sum of money for government), redistribution (transfer from rich to poor), reprising (levied on harmful things e-g; tobacco, carbon), representation (accountability to general public by the government) (wikipedia.com). In case of direct taxes, the taxpayers are generally more inquisitive to know about their taxed income. That’s why they stress the government for the illustration of its consumption. Taxes are levied at different percentage rates. These percentage rates are determined by relating with income or consumption level. It has three basic types that are progressive, regressive and proportional rates. There are two major types of taxes which are direct and indirect taxes. There are different views about the definition of these two types. In simple words it can be describes as direct taxes are those the burden of which is directly born by the tax payer and contrary to this if the burden of taxes is transferred to other or public, are called indirect taxes.
The connection between government revenue and government expenditure has been an important topic in Public economics, given its significance for policy especially with respect to the budget deficit and debt burden.
It has become progressively demanding for governments all over the world to devise suitable means of generating adequate revenue to finance government expenditure which continue to rise as a result of growth in population with its attendant demand for infrastructure and other social and economic investment. It is for this reason that taxation has become legally accepted all over the globe as one of the most appropriate means of generating revenue.
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Governments nevertheless, do not earn any revenue on their own. They must therefore devise the means to generate revenue to undertake their responsibilities. Factually, this has been done through the levying of many forms of taxes. In pre-modern periods, taxation was regarded as a direct exchange of bargain in which the taxing experts on one hand, and the tax payer on the other hand, each expected to receive equal value in relation to what it gave out. Taxes were seen upon as the wages compensated to government for its services, the principal among them being security. This concept became known as the ‘bargain theory’ (Danquah, 2007). The common understanding was that each one was to provide all his needs else he paid the government establishments to do that for him.
Notwithstanding various tax reforms that were envisioned to improve the economic and social situation by supporting infrastructure and increasing the quality of public goods provided by the government, the status quo in Ghana still remains flimsy, and the country remains amongst the poor countries in the world. Ghana still lags behind in its tax collections obligations at the domestic level. The prevalence of budget deficit and debt burden in Ghana demands that the country should invent internal revenue generating projects to complement, or better still, ultimately significantly reduce dependence on foreign funding to supplement government budget and expenditure which worsen budget deficit and debt burden among developing countries .The significant reduction of reliance on foreign funding will ensure that, a self-sustaining economy is built. One such internal revenue-generating mechanism and feasibly the most commonly used is taxation. Moreover, founded on approved budget for the financial each year, a widening budget deficit and debt burden compared to the previous finances of each year has been reported. The persistence of budget deficits and debt burden makes the case for a maximization of the tax base in Ghana.
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Expanded domestic revenue base (particularly taxation) offers a potential of more self-sufficiency in the future and a break from restrictive aid and loan conditionalties. With this view, the Ghanaian government over the years has tried to improve tax systems. For example, in the case of Ghana Revenue Agency (GRA) which has evolved from the Central Revenue Department in the 1960’s, through the Internal Revenue Service in 1986 and Customs Excise and Preventive Service to the addition of the Value Added Tax Service in1998 then to the establishment of the Revenue Agencies Governing Board (RAGB) in 2001 which was meant at fusing the boards of all the revenue collecting agencies to augment decision making and now the Ghana Revenue Authority (GRA) in 2010, which has merged together all the procedures and activities of all the tax revenue collecting agencies in Ghana. In determination to increase the government’s domestic revenue, the government introduced tax auditing into the mainstream of tax administration on 1st October 1986, this unit was introduced in the stead of the erstwhile Citizens Vetting Committee of the revolutionary era of the late 1970’s.
The Tax Audit unit of the erstwhile Internal Revenue Service was a unit under the Research Planning and Monitoring (RPM) department nevertheless with the coming into force of the Ghana Revenue Authority Law in 2010 budget; the unit now operates under the Domestic Tax Revenue Division (DTRD) of the (GRA). The core duty of the Tax Audit unit is to examine financial statements of tax payer’s with the vision of initiating their reliability, precision and completeness. It is also anticipated to detect and counter any tax evasion and avoidance schemes, augment the declared tax liabilities, ensure compliance with the Tax Laws and advice the GRA on policy formulation.
Tax audit is an extension of the usual audit generally conducted for the purpose of expressing a view as to the fairness of the accounts examined by the auditor, and the certification of financial declarations for tax purposes. It is eloquent if it is based on the knowledge of tax laws, resemblances and divergences between financial accounting and tax accounting and reporting to the tax division, recognizing their requirements to enable the latter to compute taxable income. It comprises what a tax official can look for when aiming to complete an assessment of tax. It covers also the disclosure of all significant accounting practices employed in the institution, a report on the financial accounts, i.e. the balance sheet, profit and loss account and other interrelated accounts and schedules which are part and portion of the financial reports. Furthermore, information is required to compute the assessable income as well as to ensure that the compliance of the tax laws and regulations is proper.
Revenue Gap, defined as the degree to which revenue fluctuates over the course of the government business cycle, is a severe concern predominantly for government policymakers and fiscal administrators working within the context of balanced budget requirements. It makes it very difficult to make precise predictions for future revenues and the establishment of long-term fiscal plans for the stable operation of public programs and services. With the international economy being liberalized and more tightly linked, the tax environment of governments has been increasingly unstable and uncertain over the years, and as a result, fiscal planning and management have become more challenging principally for governments operating under the institutional constraints of balanced budget requirements.
In the repercussion of the financial and economic crisis that began in late 2008, once again, countries with unstable revenue bases are experiencing severe budget deficit and debt problems.
The important repercussion of revenue gap for government finance is that in the absence of adequate fiscal reserves, it is tough for states with unstable revenue bases to avoid massive spending cuts and tax hikes in times of economic crisis when governments ‘countercyclical fiscal actions are needed more than ever. Another, maybe more important, repercussion is that such procyclical severity measures affect real economies, reducing households and businesses’ propensity to consume and subsequently creating the vicious circle of economic recession.