Question Tag: Government Revenue

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  • 5 Marks

PT – April 2022 – L2 – Q1b – Overview of the Ghanaian Tax System and Fiscal Policy

Justify the use of public debt as an alternative to taxation in Ghana's development agenda.

b) The development agenda of a developing country like Ghana can only be brought to reality through the availability of funds. The two (2) main sources of government revenue are taxation and debt. In spite of the fact that taxation remains the most reliable source of government revenue for government plans, projects and programmes, it is said to be limited in its role and function in the economy.

Required:
Justify the use of public debt as an alternative to taxation.
(5 marks)

The following are the arguments in favor of the use of public debt as an alternative to taxation:

Facilitating Growth: Public debt allows the government to finance critical infrastructure and social projects that taxation alone may not cover.
Avoids Disincentive Effects: Taxation beyond a certain level becomes a disincentive to economic activity. Public debt does not have this negative impact.
Tax Smoothing: Public debt helps smooth taxes and allows for counter-cyclical fiscal policies, reducing economic volatility.
Benefit-Cost Alignment: It shifts the taxation burden away from current generations for long-term projects, allowing future generations to bear part of the costs.
Foreign Investment: Public debt attracts foreign investment, as it is seen as a safer method for foreign investors to engage with a country’s economy compared to direct investment.
Crisis Financing: Public debt can be used in emergencies, such as during the COVID-19 pandemic, where loans helped Ghana combat the crisis.
(Any 5 points at 1 mark each = 5 marks)

  • 5 Marks

PT – Nov 2021 – L2 – Q5a – Withholding Tax Administration

State the merits and demerits of the withholding tax regime in Ghana

Withholding tax is deducted at source by an authorised agent and accounted later to the Commissioner-General of Ghana Revenue Authority.

Required:
State TWO (2) merits and TWO (2) demerits of the withholding tax regime.

Merits of Withholding Tax

  1. Faster Mobilisation of Revenue: Withholding tax ensures faster mobilisation of revenue to the state, as the tax is collected upfront before returns are made.
  2. Expansion of Tax Net: It helps in expanding the tax net, bringing in taxpayers who may not otherwise be compliant.
  3. Accurate Determination of Taxpayer’s Turnover: By withholding tax at source, the authorities can more easily ascertain the taxpayer’s actual turnover and hence the correct income.
  4. Low Collection Costs: The system involves little to no additional cost for tax collection since the tax is collected directly by authorised agents.
  5. Time-Saving for Revenue Officers: The system saves time for revenue officers, allowing them to focus on other important duties.
    (Any 2 points @ 2.5 marks each = 5 marks)

Demerits of Withholding Tax

  1. Negative Impact on Business Cash Flow: A high rate of withholding tax can adversely affect a business’s cash flow and operating performance.
  2. Potential to Discourage Economic Effort: Withholding tax may discourage additional economic effort, such as part-time teaching or work, due to the perceived burden of high taxation.
  3. Locking up of Capital: Businesses may face liquidity challenges due to the locking up of capital in the form of prepaid taxes.
  • 5 Marks

PT – Nov 2021 – L2 – Q1b – Overview of the Ghanaian Tax System and Fiscal Policy

Explain the types of fiscal policies and their effects on economic fluctuations and government revenue.

Countries worldwide experience fluctuations in economic activity, which affects the consistency in government revenue generation. For example, when income levels are high, all other things being equal, tax revenue rises. Conversely, when income levels fall, tax revenue drops, requiring government policies to address the fluctuations. Governments, therefore, employ expansionary and contractionary fiscal policies to moderate the effects of such fluctuations.

Required:
Explain the following forms of fiscal policy:
i) Automatic Stabilisers
ii) Discretionary Fiscal Policy

i) Automatic Stabilisers
Some tax and expenditure programs change automatically with the level of economic activity. These are called Automatic Stabilizers. Automatic stabilisers refer to how fiscal instruments (taxes and government spending) influence the growth rate and help counter swings in the economic cycle.

  • In a period of high economic growth, automatic stabilisers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues as people earn more and pay more income tax. With higher growth, there will also be a fall in unemployment, so the government will spend less on unemployment benefits.
  • In a recession, economic growth becomes negative. However, automatic stabilisers will help to limit the fall in growth. With lower incomes, people pay less tax, and government spending on unemployment benefits will increase. This helps limit the fall in aggregate demand.
    (2.5 marks)

ii) Discretionary Fiscal Policy
Discretionary fiscal policy refers to deliberate changes in taxes or spending. The government cannot control certain aspects of the economy related to fiscal policy. For example:

  • The government can control tax rates but not tax revenue, which depends on household income and corporate profits.
  • Government spending depends on government decisions and the state of the economy.

Discretionary fiscal policy can be divided into two:

  • Expansionary fiscal policy: This increases government expenditures and/or decreases taxes, causing the government’s budget deficit to increase or its budget surplus to decrease. This policy will shift the aggregate demand curve to the right.
  • Contractionary fiscal policy: This decreases government expenditures and/or increases taxes, causing the government’s budget deficit to decrease or its budget surplus to increase, shifting the aggregate demand curve to the left.
    (2.5 marks)
  • 6 Marks

AT – Nov 2018 – L3 – Q1b – Tax administration in Ghana

Explaining the benefits of foreign debt over domestic debt for government financing.

The use of debt for a country’s financing has engaged the attention of economists and also the ordinary man in the interest regarding its impact on our economy. While some prefer domestic debt, others are making a case for foreign debts as part of government’s fiscal policy.
Required:
What are the benefits to a government for going in for a foreign debt as opposed to going in for domestic debt as a support to the revenue base from taxes? (6 marks)

The benefits of foreign debt as opposed to domestic debt are as follows:

  • More inflows from foreign sources to support national development.
  • The private sector can borrow locally to expand businesses as they have no competition from the government.
  • Government can carry out its projects successfully as loans from foreign sources can be acquired in larger amounts.
  • Loans from foreign sources can be used to support local firms that might not be able to acquire such loans due to lack of collateral or poor credit ratings.
  • Borrowing from foreign sources leaves more liquidity in the domestic economy for locals to spend, boosting economic activity.

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