EFFECT OF DOMESTIC REVENUE GAP ON BUDGET DEFICIT AND DEBT BURDEN: EVIDENCE FROM GHANA

Background of the study

Introduction

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.

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.