Introduction to public finance and taxation

1. Debre Markos University
School of Law
LL. M in Investment Laws and Governance
Course Name: Advanced Tax Law and Policy
Course code: Laws-6311
Cr. Hr 3, ECTS 5
*Alemu Taye Enyew
LL.B, LL.M- in Business And Corporate Law*
*Assistant Professor in Business Law*
*Dean Debre Markos University Law school*
*Phone: +2519-17423105*
*E-mail: alextaye20@gmail.com*

2. Public Finance?
• Public Finance- is an interdisciplinary science (political, economics,
accounting, law, etc) that study the income raising or expenditure incurring
activities of a government.
• Basically, it
1. Deals with how the public treasury operates (how the government
obtain revenue, spend revenue, borrow, budget)
2. Defines the functions/activities (expenditures) of a government and
possible sources of revenue.
3. Deals with inter-governmental financial relations (in both federal and
unitary state structures)
• Generally, it falls naturally into four parts:
 Public Revenue (Funds from different sources)
 Public Expenditure (expenses to finance its different activities)
 Public Debts (Financial liabilities or borrowing of a government when
PE exceeds PR or in times of emergencies such as war, epidemics)
 Public budget (A yearly financial plan of a gov’t Prepared by the
executive and approved by the legislative)

3. The Role/function of the Government
• Government functions are often labeled as:
1. ‘Traditional’ functions of a state
 Maintenance of law and order through the 3 wings
 Provision of defense- protect the society from internal/ external
aggression
2. ‘Modern’ roles of a state
 Allocation; production and provision of public goods
 Stabilization; maintaining high employment, fighting inflation and
an appropriate level of economic growth.
 Regulation:
 Distribution; distribution of income and wealth in conformity with
what society regards fair
• The size of governments’ function vary with the prevailing political
economy in a country.
 Liberal/neoliberal/ free market
 Socialist/command

4. Cont’d
• Even though the size of the role in the economy if often debatable and
yet unsettled, market defect justifies government intervention.
• An economy comprises two actors: the State and the market that
play supplementary/complementary and sometimes exclusionary
roles.
• Instances of market failures includes:
o Provision of public goods and services
o Externality/ Spill over
o Monopolies
o Oligopolies
o Asymmetry in information
o Existence of Deterrents to invest
o Macroeconomic/social problems
 State intervention in the economy increase government expenditure
and demands wide revenue sources.

5. Revenue Sources
• Tax Revenue- have very distinct nature
• Non-Tax Revenue
• Fees/charges
• Fines or Penalties
• Surplus from Public Enterprises
• Grants and Gifts
• Loans
• Escheat
• Money Creation
• Wealth
confiscation/nationalization/expropriation

6. Tax?
• There are really several definitions form different scholars or disciplines.
• This definition preferably reflects the very nature of taxation:
• Taxes are compulsory contributions by a taxpayer to government
revenue in the common interest of all without direct benefit’.
• Its mandatory to understand
• Tax base- the legal description of an object where tax can be imposed on
including income (wages, interest and dividends), consumption (Sales
tax, Excise tax) or property (Capital gains, Inheritance)
• The different kinds of taxes
• Tax rate- the amount of tax a taxpayer pays per unit of tax base having
regard to the unit of measurement (weight, volume, package, price,
income etc.)
• Subject of taxes -Taxpayer - a legal entity or individual
• Impact- its final resting place. Those finally bear the money burden &
which are not able to pass it on to others.
• Incidence- its first point of contact

7. Purposes and Functions of Taxation
• Taxes are imposed to achieve several functions
• Financial Objectives: Financing expenditure of
government activities (such as defense, social
security, health, education, road, electricity, water,
law and administration etc.) is the primary purpose
of taxation,
• Economic Objectives, stabilization, discourage
import, inequality..
• Social Objectives: discouraging consumption of
harmful products and services, and encourage
other social interaction
• Political Objectives: Fiscal federalism

8. Theories and Principles of Taxation
• As taxes have diverse nationwide purposes and functions, the
process of levying and collecting must be done with great care and
rationality.
• Taxpayers and tax authorities must follow certain code of conducts
in taxation and tax administration.
• These codes of conducts are canons or principles/guidelines-maxim
or criteria developed by scholars.
• It is a measurement for 'Good Tax System.
• Equity: Why tax equity, moral claim (appropriate to treat people equally) good
for the tax system itself(encourages voluntary Compliance) two theories of tax
equity are ability to pay and benefit received theory. Two dimension of equity
are horizontal and vertical equity.

9. • Certainty: It means not arbitrary (the amount, the
rate, type and manner of payment must be known).
better to live with inequality than uncertainty: all
other aspects of taxation can go wrong when the tax
system lacks certainty.
• Efficiency: costs of taxation (costs of taxation and
compliance cost).
• Convenience: The mode, place and time of payment
should be convenient to the taxpayers. shouldn’t
create unnecessary trouble.
• Simplicity: its opposite of complexity(extensive
recordkeeping, dozens of deductions and credits,
vagueness.
• Neutrality: Government should not collect too much tax to finance its
operations and too little tax to favor taxpayers. do not influence the decision
save to discourage consumption of products.

10. History of Modern Taxes in
Ethiopia
• taxation has long history- almost equal to state formation.
• Modern taxes introduce in Ethiopia in 1940s.
• The first taxes were Land tax and agricultural income tax law in
1942. It repealed in 1949 that divided land into ‘fertile’, semi-fertile’
and ‘poor’ lands paid 15, 10 and 5 Birr per Gasha respectively.
• In 1954, the Ethiopian government introduced a ‘cattle tax’ 0.50 Birr
per head of camel, 0.25 Birr per head of horned cattle, 0.25 Birr per
head of horse, 0.25 Birr per head of mule, 0.10 Birr per head of
donkey, 0.05 Birr per head of sheep or goat and 1.00 Birr per head
of pig. It assessed by elders of the district.
• Because of four principal factors, the government was not able to
raise revenues. Orthodox Church owned vast land; many tax
evasion; no proper land measurements; and the tax rates were not
progressive.
• uniform agricultural income tax in 1967, with progressive tax rates

11. Cont.…
• There were stiff resistance due to measurement of land’.
• The 1976 law (remained in force into the 1990s) land use
fee set a lower fee for members of agricultural
cooperatives.
• the decentralization of land and agricultural taxes to
regional governments in the post 1991 (imposed based
on size of land holding and annual agricultural product).
The Education and Health Taxes
‘Education Tax’ and Health Tax in 1947 and 1959
respectively. That were earmarked tax.
Taxpayers were interested for earmarked tax.

12. The Main Income Taxes
• The first modern income tax law (outside the agricultural
system) was issued in 1944. it was schedular (A personal
income, B business and C sur-tax on special classes of B) and
payable in pound.
• 1944 law repealed by 1949 and it was presumptive and grant
income tax exemptions to encourage investment for the first
time.
• 1949 repealed by 1956. A employment, B rental of land and
building, C business. For the first time 1956 income tax law
introduced a monthly accounting for Schedule A.
• It has changed by 1961 remained in force for a long time – for
more than 40 years until 2002.
• Modification in 1978 that incorporate miscellaneous’ income
• Tax rate was 89% for Businesses, 85% for employees, 40% for
royalties, 25% for dividends and 10% for games of chance.

13. • some of the reforms of the 2002 income tax were
extended Ethiopian income tax jurisdiction over the
worldwide income of residents, the insertion of provisions
combat avoidance of income taxation, reduction of tax
rate, serious criminal and civil liability, equitable, strong
enforcement organ, tax foreclosure, priority claim, strong
record keeping and withholding rule.
Excise and custom duty Taxes
• Excise taxes are sales taxes imposed on a limited category of goods
(especially on producer/manufacturer, import and exporter). The
first target of excise taxation was tobacco – in 1942. The second
targets of excise taxation were foreign product alcohol in 1943.
• In 1948, Highway Renovation Tax on petrol
• From the middle of the 1950s and increasingly after that, Ethiopian Governments
began to see excise taxes revenue generation (widely consumable goods like
sugar, cotton and textile)

14. Cont.…
• We could clearly discern at least four categories of excise taxes since
1960s. There are excise taxes on products selected for
 sumptuary purposes (alcohol, tobacco, and asbestos).
 ‘benefit’ excises imposed upon petroleum product to recoup the
costs of road construction and maintenance.
 luxury excises (watches, jewelry and vehicles)
 ‘revenue’ excises levied upon widely consumable goods(sugar, salt
and textile products)
• Customs duties are the most frequently revised tax laws, and indeed
of any laws in the land.

15. Fiscal Federalism and Revenue Sharing Under the
Ethiopian Constitution
• It deals basically with the division of revenue
raising power and expenditure responsibilities to
two layers of governments formed by federalism.
• imagine the Ethiopian fiscal map. Under this
revenue map we will find high ways of revenue
which of the layers of the government exercise
what powers. Remember that all these high ways
represent articles of the constitution.
These are high ways 96, 97, 98, 99, 105 and 100.

16.  High way 96 is allowed only for the federal government to travel on
 high way 97 is left only for the regional governments
 high way 98 for the joint use of the federal government and there
regional government.
 high way 99 is neither the federal government nor the regional
governments can travel on. It is undesignated high way.
 high way 105 will have the power to modify high ways 96, 97, 98 and
99.
Generally the revenue land scape of the FDRE constitution simply
locates which taxes belong to highways 96, 97, 98 and 99 etc.
Remark: We can notice that the FDRE constitution in matters
of taxation departs from the principle of residually laid down
in art. 52