Taxation

The Functions of Taxation

The functions of taxes are a manifestation of their essence; they are a means to represent the characteristics of taxes. The functions of taxation illustrate its social purpose of the value-based distribution and redistribution of income. Each of the functions fulfilled by the taxation instrument is a manifestation of an internal feature, an indicator or trait or this economic category.

There are five main functions of taxes: fiscal, redistributory, regulating, controlling, and promoting.

1) The main function of taxation is the fiscal one. It is through fiscality that taxes play their role in the formation of the state budget necessary for the realisation of national and holistic state programmes. The fiscal function provides for the achievement of the main social goal of taxation—the formation of the state’s financial resources necessary for executing the role of the latter (defence, social, environmental protection, etc.)

2) The allocation function of taxation expresses their essence as a special centralised instrument of allocation relations and consists of the social income redistribution among various groups of citizens: from wealthy to deprived ones, which ultimately provides for the assurance of the social stability of the population.

3) The regulatory function of taxation was initiated as soon as the state started to take active part in the economic set-up of the society. This function is aimed at achieving specific goals of the taxation policy through the taxation mechanism. Taxation regulation entails three sub-functions:

a. The stimulating sub-function is aimed at the development of special socio-economic processes, and is implemented through a system of allowances, exemptions and preference arrangements. The legislation in force stipulates the stimulation of a number of taxpayer categories such as the owners of small enterprises, the agricultural producers, capital investors, or charities.

b. The destimulating sub-function inhibits some socio-economic processes through the conscious exaggeration of the taxation burden. As a rule, the effect of this sub-function is related to the introduction of excessive tax rates. These are, for example, the protectionist measures of the state, aimed at supporting local producers through prohibitive import custom duties. It is important to keep in mind, nevertheless, that taxation relations, as any other relations, must replicate continuously. Taxes must be collected today, tomorrow and always. This is why the utilization of the destimulating sub-function should not lead to the weakening of the taxation basis, to suppression, or even to liquidation of the tax source. Such an exaggeration may result in a situation where there will be no income/processes to be taxed.

c. The replication (regeneration) function is explained as follows: by taxing the utilisation of natural resources, roads, mineral and primary resources, the state uses these proceeds in order to regenerate the exploited resources.

4) The controlling function of taxation—through taxation, the state controls the financial-economic activity of juridical and natural persons. This also contributes to controlling the sources of income and the directions of spending.

5) The incentive function stipulates special taxation arrangements for a certain group of citizens, who are social achievers (participants in wars, etc.). This function of taxation has a social facet

Taxation Elements

The Subject and Object of Taxation

The unifying basis of all taxes in the RM and other countries are the taxation elements. One of the main elements, typical for the taxation instrument as a whole, is the notion of payer, i.e., the notion of the taxation subject.

The taxation subject is the individual or company, fulfilling taxation obligations in accordance to the ownership of the taxation object. Every citizen of a state is a taxation subject. If the state has the right to deduct a part of the income, this relates to the obligation of each citizen to offer a part of his/her wealth to the state. In this context, one should not forget about the distinction between the taxpayer and the tax carrier. The former is the entity that initially pays the tax; the latter is the entity carrying the tax as a result of economic processes and transfers. This takes place primarily at the deduction of secondary taxes. For example in RM, taxation subjects are responsible for paying the VAT, yet the real carriers of the tax are the consumers.

The taxation object is the object or phenomenon, which, according to the law, is being taxed. Taxation objects can be classified in the following way: income (income tax), wealth (real estate, land), wealth transfers (inheritance and gift tax), consumption (excises and VAT), or the import and export of goods (customs duties). Income taxation is divided into the taxation of earned and unearned income. Earned income tax relates to salaries, fees of people engaged in freelance occupations, the income of individual juridical persons. Taxation of unearned but legal income refers to dividends, interest revenue, capital expansion, land and real estate rents. The taxation object materializes as a result of legal events (actions, events, conditions), which affect the obligation of the subject to pay the tax: the sale of goods, works and services; the transit of goods though a customs territory, ownership of wealth, the receipt of inheritance rights, the receipt of revenue in one or another form.

Tax Allowances

A tax allowance is a full or partial reduction of the taxation burden in correspondence with the legislation in force. In the international practice, the system of allowances and reliefs has been formed a long time ago. Individual income is taxed only after it reaches a certain level (which is the non-taxable income). Additional sums for the maintenance of each dependant, expenditures for the support of infants and elderly, for medical services that cost over a certain amount, for charitable donations and for education expenses are subtracted from the taxed income.

It is possible to develop a certain systematisation of tax allowances. These can be classified into permanent and temporary allowances. Temporary allowances are granted to adolescents, refugees, foreigners, and people without a permanent residence in the given state but who are there only temporarily. Permanent tax allowances are granted to people, who are fulfilling other obligations or who have earned special merits with the state.