INTRODUCTION TO TAXATION

TAX TERMINOLOGY, TAX SYSTEM

INTRODUCTION TO TAXATION

TAX

Albert Einstein said:

„ The hardest thing to understand in the world is the
income tax.“

• It is a sad fact that almost any country´s taxation

system is so complex that very few people will
understand it completely and yet the average citizen
and business are expected to comply in full with the
tax requirements that are applicable to them.
INTRODUCTION TO TAXATION

THE NEED OF TAXATION

The economic resources available to society are

limited, and so an increase in government
expenditure normally means a reduction in
private spending.
Taxation is one method of transferring resources
from the private to the public sector.
Governments often use also other methods of
rising resources, taxation is usually the most
important source of government revenue.
Most countries have a tax system that differs from
that of other countries.
INTRODUCTION TO TAXATION

TAX
Characteristics of tax:
• monetary,
• mandatory,
• non-equivalent,
• nonspecific charge or other levy imposed on a taxpayer
by a
state.

• Tax is implemented by law and failing to pay taxes is

punishable
by law.
• Taxes can be paid regularly or occasionally based on
certain conditions stipulated by the tax legislation.

• Customs duties are also classified as taxes as they are

paid on imports of goods based on customs regulation.
They are enforceable by law and are included in the
INTRODUCTION TO TAXATION

THE SYSTEM OF PUBLIC INCOMES OF THE CR

Taxes are the Public

basic and the incomes
most significant
source of
public
incomes;
however, Credit
obviously they Non-credit - state loans
are not the - securities issued
by state
only source.

Non-tax
- compulsory
Ta contributions to state
funds
x
- charges
- other incomes
INTRODUCTION TO TAXATION

THE FUNCTION OF TAXES

• In the society taxes

Fisca
l
fulfill the whole
range of important
functions and their Allocatio
role implies from n
main economic
functions of the
public sector. Redistributi
• The fiscal function is on
historically oldest
one and is included
Stabilizin
in all three above
g
mentioned
functions.
INTRODUCTION TO TAXATION

ALLOCATION FUNCTION

• This function is asserted at symptoms of ineffectiveness

of the
market in allocation of sources.
• Taxes can have the influence on placing the means into
the spheres or branches in which the state will be
interested (e.g. by means of tax allowances, or tax
holidays at fulfilling certain conditions related to the
volume of investments, new technologies, and creating
new jobs).
• In case when taxes fulfill this function we speak about
so called indirect financing or the tax support.
INTRODUCTION TO TAXATION

REDISTRIBUTION FUNCTION

• The redistribution function relates to redistributing

incomes in
the society.

• Taxes allow to moderate differences in incomes among

people. This function allows to transfer incomes from
individuals with higher incomes to the groups of
population with lower incomes.
INTRODUCTION TO TAXATION

STABILIZING FUNCTION

• The stabilizing function of taxes is an integral part of

the economic policy of the state and by means of
that taxes can contribute to cyclic swings in
economy.

• In the period of prosperity, when incomes and

consumption as well grow fast, taxes take away a
higher part into public budgets. It helps precede
overheating of economy.
• On the contrary in the period of stagnation lower
taxes help to start up the economy.
INTRODUCTION TO TAXATION

FISCAL FUNCTION

• It is the primary function which ensures money for the

public
budget.

• At the allocation function it gains financial means for

financing the areas underestimated by the market,
• at the redistribution function it is redistributing money
with the aim to reduce as least partly the income and
the social inequality in the society
• and at the stabilizing function incomes are regulated in
accordance with the economic cycle.
INTRODUCTION TO TAXATION

CLASSIFICATION OF TAXES

• by ties to the income of taxpayer

– Direct
– Indirect
• by tax base
– Capital taxes
– Current taxes
• by tax entity
– Individual
– Household
– All members of household
– Corporation
INTRODUCTION TO TAXATION

CLASSIFICATION OF TAXES by ties to the income

of taxpayer
Direct Indirect
• Tax is paid directly from • Indirect taxes are
the supposed to be paid
taxpayer´s income. from the price charged
• It is supposed that direct by the taxpayer to the
taxes shouldn´t be customer.
generally shifted to • The tax burden is
other taxpayers. effectively born by the
• For example income customer and not by the
taxes or taxes taxpayer who only
imposed on the collects the tax for the
ownership of property government.
or transfers of • For example VAT or
property. excise
duties.
INTRODUCTION TO TAXATION

CLASSIFICATION OF TAXES by tax

base
Capital Current

• Taxes based on a stock • Taxes based on a flow of

of something.
something. • Current taxes on income
• For example are
wealth taxes, – income tax, corporation
inheritance tax. tax.

• Current tax on
expenditure are
– VAT and excise duties.
INTRODUCTION TO TAXATION

The OECD classification Organisation for

Economic Co-operation and
Development
• Taxes on income, profits and capital
gains
• Social security contributions
• Taxes on payroll and workforce
• Taxes on property
• Taxes on goods and services
• Other taxes
INTRODUCTION TO TAXATION

BASIC ELEMENTS OF TAX TECHNIQUE

1. TAXABLE SUBJECT
person to whom the tax liability applies (taxpayer)

2. TAX OBJECT
legal fact that causes the tax liability to arise (on income,
on
existence – the pool tax)

3. TAX BASE
The tax object specified, quantified in money or in other
exact units

4. TAX RATE
The measure applied to tax base, quantifying tax liability
INTRODUCTION TO TAXATION

TAXABLE SUBJECT

• The taxpayer is the person, who carries the tax burden,

can be at the same time the payer of the tax. That
means the person levies himself the tax to the public
budget. The natural person who runs business on the
Trade Licence Certificate carries the tax burden from
incomes from business activity, that means he/she is a
taxpayer, but at the same time also a payer as he/she
is obliged to calculate the tax by himself/herself and to
levy it to the public budget.
• The payer of taxes is a payer who is obliged to levy the
tax from the law. In some examples it occurs that he
levies the tax for another taxpayer, that means his
disposable income will not reduce. In practice this
possibility occurs at taxation of employment (that
means employees), when the employer (the payer of
INTRODUCTION TO TAXATION

TAX OBJECT AND TAX BASE

• The tax object is a magnitude from which the tax is

collected. It is a subject-matter for taxation. A brief
definition of the object of taxes is generally the part of
the name of the tax act (e.g. the Income Tax Act, the
Act on Inheritance Tax, etc.).

• It does not have to be always expressed in value; it can

appear also in the material form – properties,
buildings and land, or at the excise duty hl of beer, etc.
Consequently after transferring the material
formulation of the object of taxation into its value
formulation, after tax reliefs, tax allowances and tax
exemptions the tax object is made concrete in the
defined tax base.
INTRODUCTION TO TAXATION

TAX BASE

• The tax base is necessary to be defined not only

factually (i.e. from what the tax will be levied), but also
as for time. The taxable period is a time interval for
which the base, the amount of taxes, is set and the tax
is levied.
• The basic taxable period is generally one calendar year.
It is used at all direct taxes. At excise duties this
interval is shortened and one month or one calendar
quarter is the taxable period.

• Taxes in relation to the taxable period can be divided

into:
– taxes which are exempted from the taxable period, i.e.
that they are collected in connection with the
occurrence of a certain event (e.g. inheritance tax, gift
tax),
INTRODUCTION TO TAXATION

TAX RATE

Single

Differentiated
Tax rate
Fixed
L
i
n
e
a
r
Relative
P
r
o
INTRODUCTION TO TAXATION

TAX RATE

• The single rate exists for example at the real estate

transfer tax (it makes x % from the tax base).

• The differentiated rate is used by the VAT tax (x %, y %)

and it can be differentiated not only as for the object of
taxes, but also as for the taxpayer (e.g. at the
inheritance tax and the gift tax when the tax rate is
lower for persons next of kin and highest for non
relatives).

• The fixed rate is set by the absolute amount and we

find it at the excise duties (the tax rate on 1 hl of
beer, one cigarette) or at real estate taxes (taxation
on 1 m2 of the build-up area).
INTRODUCTION TO TAXATION

TAX RATE

• The relative rate is used where the tax base has a

value character. The rate is set as a certain share
(percentage) from the tax base. It is used at common
taxes (especially at income taxes).

• The linear tax rate is constructed in the way that the tax
rises with the rise of the base in the same ratio. It is set
by a certain percentage from the tax base which will
not change with the size of the tax base. The
advantage of the linear rate is a simplicity of the
calculation of taxes (it makes x % from the tax base).
INTRODUCTION TO TAXATION

TAX RATE

• The progressive tax rate is more difficult by its

construction. With the growth of the tax base the tax
grows relatively faster than the tax base. It can have
the form of various calculation algorithms. The most
frequently the tax bracket rate is used and it is in the
way that the tax base is divided into several brackets
as its size and for each bracket another level of rate
(the higher the bracket the higher the tax) is set.

• Also here we find two variants, that is:

– a variant of the progressive graduate rate
– a variant of the progressive sliding rate
INTRODUCTION TO TAXATION

TAX SYSTEM

• Taxes are the essential source of financing of the public

sector.

• The advanced tax system is characteristic by the effort

to
influence, to stimulate and to respect the
social, economic, environmental, external, political
and other activities of the government.
• From this point of view it is obvious that many changes
of taxes correspond to the strategy of government
priorities in another sphere.
• Taxes should be neutral as most as possible and their
selection
the cheapest for the state and the taxpayer as well.
Table 1: Total taxes (including compulsory actual social contributions) as % of
GDP in 2018

50,0
46,5
44,8 45,1
43,8
45,0 42,3 42,2
41,8
40,6 40,1 39,3 40,0
39,240,2 38,9 38,6 38,7
40,0 37,6 37,6 36,9
36,1
34,7 33,8 35,234,9 34,1 33,8
35,0 32,8
31,8
29,9 31,030,2
30,0
26,3
25,0 22,6

20,0

15,0

10,0

5,0

0,0

France

Luxembour

Portugal

Slovenia
Netherlands
Greece

Lithuania
Italy

Malta

Austria
Poland

Romania
g
Hungary
EU-28
EU-27

Belgium

Spain
Denmark
Bulgaria

Estonia
Germany
Czechia

Croatia

Cyprus
Latvia
Ireland
EA-
19

Source: https://ec.europa.eu/taxation_customs/business/economic-analysis-taxation/data-
taxation_en
INTRODUCTION TO TAXATION

TAX SYSTEM – TAX PRINCIPLES

• In conditions of the market economy the rational tax

system is based on certain tax principles:
– the principle of tax justice,
– the principle of tax efficiency,
– the principle of legal perfection,
– the principle of simplicity and comprehensibility,
– the principle of correct influencing of the conduct of
economic entities.

• For the conditions of the market economy it was

necessary to ensure also principle of:
– neutrality and
– tax universality.
INTRODUCTION TO TAXATION

TAX JUSTICE

• Every taxpayer contributes to the public budget by

means of taxes and his participation should correspond
to his ability to pay and also to the benefit which he has
from the consumption of services provided by the state.
This principle of tax justice is understood in two
positions:
– The principle of the ability to pay consists in a simply said way
in the fact that the taxpayers approximately with the same
incomes pay the same taxes to the public budgets. It is also
in the fact that they pay as for their own possibilities, that
means who has more should also contribute more to the
budget (from that the progressive tax scale at incomes of
natural persons applied in nearly all countries). Fulfilling this
principle is, however, very complicated.
– The principle of the benefit is connected to the fact that who
uses public services should also pay the taxes from which
these services are financed (e.g. at the road tax – the tax
revenues are used for the maintenance and building of roads).
INTRODUCTION TO TAXATION

TAX EFFICIENCY

• Tax efficiency is connected above all with administrative

costs of the tax option (the direct ones are carried by
the state and the indirect administrative costs
(compliance costs) that are carried by taxpayers).
• The claim of efficiency is connected with the claim for
the respective taxes not to cause distortion in prices
and benefits for various kinds of activities. Distortion
leads the taxpayer to substitution of taxed goods or
other services that are not taxed. This way the
efficiency in allocation of sources in economy is
disrupted. Unproportional tax burden should also restrict
work effort of people, willingness to save and to accept
business risks; it should create barriers of the entry to
the productive foreign capital.
INTRODUCTION TO TAXATION

TAX PERFECTION

• Tax perfection is the essential requirement for creating

a quality tax system.
• In the opposite case the effectiveness of the tax law
declines
and this obviously leads to the tax evasion.
• The task of the tax administration and tax
legislation is to minimize tax evasions which
decrease incomes from public budgets and limit
the tax justice.
• This principle relates directly to simplicity and
definiteness of legislation.
• The collection of taxes should be simple, undemanding
on administration and undemanding on costs for the
state and the rate payer as well.
INTRODUCTION TO TAXATION

SIMPLICITY AND COMPREHENSIBILITY OF

TAX LEGISLATION

• Simplicity and comprehensibility of tax legislation lays

thus in
definiteness and transparency.

• Every taxpayer should know the extent of his tax

liabilities.

• Non-transparency of the tax system is one of causes

which
discourage the foreign capital.

• Modern, effective tax and customs administration

contributes to
this principle.
INTRODUCTION TO TAXATION

THE PRINCIPLE OF CORRECT INFLUENCING OF THE

CONDUCT OF ECONOMIC ENTITIES

• The principle of correct influencing of the conduct of

economic
entities is no less important.

• The tax policy is a significant part of the

macroeconomic policy and it should support the
business activity.

• It should make investments advantageous before

consumption, economic activities friendly to
environment and should attract the foreign capital.
INTRODUCTION TO TAXATION

PRINCIPLE OF NEUTRALITY AND UNIVERSALITY

• By the principle of neutrality taxes must not influence

the actual running reproductive process of business
entities.
• Taxes represent the external factor which determines the
decision of every business entity and which every
business entity must take into account at preparation of
the business plan.
• Taxes play role as the constant parameter in business
plans, the
form of ownership, kinds of activities or kinds of
products.
• They do not make differences between the domestic
and foreign capital.
• The principle of tax universality is connected closely to
the
INTRODUCTION TO TAXATION

FACTORS INFLUENCING TAX SYSTEMS

• Tax systems depend on the whole range of factors

which influence in mutual contexture fulfilling of
basic principles and functions of taxes.

• There are:
– economic factors
– political factors
– cultural-historic factors
– administratively-institutional factors
– technical progress
– globalization
INTRODUCTION TO TAXATION

ECONOMICS FACTORS

• The structure and the size of tax incomes as well

depend mainly on economic factors, such as the branch
and geographic structure, the structure of labour force,
the economic growth, the rate of inflation and the rate
of economy integration into the international trade. The
branch structure influences the share of taxes paid by
individual persons and by companies.
• In states, where the share of companies is higher, there
it is also a share of employees higher than the share of
self-employed ones. Employees are taxed in an easier
way than self-employed persons, as the tax is deducted
from their wages at the source and they cannot
influence the tax base by decreasing their incomes by
tax expenses.
• The country with a higher proportion of small
INTRODUCTION TO TAXATION

POLITICAL FACTORS

• Political factors play a significant role at deciding on

the tax legislature in the country and they can
(especially in the short term) overweigh the
economic arguments as well.

• Any change of the tax system is a result of the political

decision of the party in power (a left wing one or a
right wing one) which implement its political program.

• At present issues in the tax sphere are becoming a significant

part of the programme of every political party.
INTRODUCTION TO TAXATION

CULTURAL-HISTORIC FACTORS

• Cultural and historical factors are important as well.

The present interest of the European Union in
harmonization of tax systems is often in the contrast
of national traditions.

• Especially in the sphere of personal income taxes

this effort conflict with the individual policy of
country which has established ways of taxation, tax
moral and the tradition of functioning of the state
offices collecting taxes.

• In the countries, e.g. of Southern Europe, with a higher

share of grey economy it is recommended to increase
the share of indirect taxes at which the tax evasions
are more difficult.
INTRODUCTION TO TAXATION

ADMINISTRATIVELY-INSTITUTIONAL FACTORS AND

TECHNICAL PROGRESS
• The disharmony of the tax legislation and the tax
administration do not correspond with needs of the
current development.
• They negatively influence the business environment
and the complexity. Non transparency of the tax
legislation discourage domestic and foreign investors
from business activities.

• Technical progress as well is not less important. This

progress influences all economic activities and it is
reflected in the sphere of taxes as well. More perfect
forms of trade as the internet shopping and trade with
sophisticated financial derivates are also the appeal for
improving taxation.
• On the other hand the technical development provides
INTRODUCTION TO TAXATION

FACTORS OF GLOBALIZATION

• The factor of globalization which partially or

completely annuals also tax borders manifests
itself in tax systems in a more and more intensive
way.
• Reforms of tax systems do not proceed individually,
but they react on the international development.
Adaptation to the legislation of the EU also belongs
into this category of tax adjustment.
• It is necessary to take into account that the tax system
is not a single phenomenon and it is influenced by the
whole range of factors. The aim of the state in the tax
sphere is mainly to create conditions for the economic
stability of the country, to promote the economic
development and competitiveness and to suppress
social tension and to develop social activities.