History of Fiscal Administration and the Theory and Purpose of Taxation
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Fiscal Administration is not difficult to define. In simple terms, fiscal administration is the branch of economics that deals with the revenues and expenditures and their impact on the economy. It is the manner of collecting something from the constituents and spending it also for the constituents. And the exact definition according to http://www.wisegeek.com/what-is-fiscal-administration.htm, fiscal administration is the act of managing incoming and outgoing monetary transactions and budgets for governments, educational institutions, nonprofit organizations, and other public service entities. Constituents charge leaders, whether governmental or organizational, with establishing fiscal policy as part of their duties in relation to responsible fiscal administration. Fiscal policies are tools for the development of fiscal planning budgets, based on the receipt of anticipated funding. As fund disbursement in the form of payroll, purchases, or other expenses occur, management reports appropriate accounting information back to organizational leaders. Historical data, future revenue projections, and current budget demands determine needed adjustments.
The entire process forms the basis for future fiscal administration decision making. Leaders of government, nonprofits, and other public service entities have a fiduciary responsibility to those who put them in office, individuals better known as constituents. Effectively managing the fiscal administration of an entity contributes to its overall financial health and ability to continue serving constituents. As such, laws dictate much of the particulars with regard to preparing financial statements, recording transactions, and balancing budgetary demands for such organizations. Fiduciary responsibility dictates that these reports demonstrate responsible management and recording of all activities involving monies paid to or spent by the organization. Government fiscal administration, specifically federal fiscal administration, creates many opportunities for error. By their very nature, governmental organizations are large and complex, requiring numerous divisions, departments, committees, and other bodies. While revenue streams follow only a few paths through these many departments, disbursements and expenses come from all areas.
With so many sources of information concerning monetary transactions, errors and omissions may easily slip through unnoticed, creating compromising and difficult to decipher problems. The complexity and sheer volume of information necessary to find such errors explains how corruption often goes unnoticed in certain government sectors. Private sector organizations, such as nonprofit agencies and public postsecondary schools, also experience difficulties deciphering errors in fiscal administration. While these organizations are also large and complex, public reporting documents require far less time to analyze. For this reason, problems with financial management in a nonprofit or public university usually present faster than governmental agencies. This term paper does not just aim to reveal the definition and history of fiscal administration but as well as taxation being one of the sources of the funds being used in the fiscal administration. The author of this term paper wants to find out the following questions: What are the stages of time occurred developments in financial administration and taxation?
When was taxation started? Why is taxation important in fiscaladminitration? As we begin the discussion on the fiscal administration it would be better if we start with the development of Fiscal Administration. As discussed in the book of Leonor Magtolis Briones entitled Philippine Public Fiscal Administration, the development of public finance institutions merely reflects the development the development of organized society, particularly the state. Changes in concepts of what should be the functions and responsibilities of the state have to a large extent shaped concepts of what the goals of public finance ought to be. For after all, public finance raises and spends revenue for the functions of the state. These functions have been changing with the development of the society. Thus, tracing the development of public finance institutions necessitates an examination of the development of organized society itself.
Early Public Finance
If we are to trace the origins of public finance institutions, we would probably start with the beginnings of the state under the slave societies. Under the primitive societies, there was not probably much public finance to speak of. The primitive tribes were on subsistence basis, with hardly any surplus. Whatever was acquired form hunting and fishing was immediately consumed. Battles over territories, the capture of defeated tribes who were turned into slaves, te development of settled agriculture and rudimentary advances in the production of goods led to the great empires of Asia, Africa and Europe. The early public finance institutions of these slave societies served as foundations for modern institutions and practices.
Ancient public finance provided some of the basic instruments of public financial management. Medieval public finance further refined some of these concepts, distilling their basic aspects by an expanded application to medieval public goals and conditions. It also introduced some basic tools like accounting and auditing. The idea of financing public goals and activities is as old as the organization of public authority. Logically, the beginnings of public finance started from the creation of the state. The state was created by necessity to protect and purportedly promote the welfare of man. Basically, the state was comprised of: the government, the people, territory, and sovereignty. Public finance was supposed to preserve the state and promote the goals of society. In particular it financed the activities of government.
Medieval Public Finance (395 A.D.-1500)
The development of medieval public finance closely followed the changes in political structure of the state during the Middle Ages. These changes encompassed the weakening of the monarchy (central government) at the outset of the medieval period, the subsequent fragmentation of public authority resulting in the system of feudalism, and the rise of limited monarchy at the end of the era. The shifts in the form of government were gradual. Hence, the institutions of political authority and their economic, social, and cultural ramifications were only diverse but overlapping.
Moreover, medieval conditions were greatly varied in scope and nature among the different European States. While medieval conditions reinforced some of the basic concept in ancient public finance, the complexities of state governance greatly transformed the finance institutions in terms of form and application. In the face of changing conditions, the form and structure of taxes and other revenue instruments were adapted to varying sources and subjects of levy. While retaining its traditional purposes, i.e., for public concerns, public expenditure changed in terms of scope and composition. Accounting and Auditing gradually acquired tangible forms. Public borrowings became institutionalized due to increased expenditures of the government evolving a semblance of debt management. It was the system of feudalism which exerted the most significant impact on medieval public finance.
Feudalism was essentially the system of economic relationship based upon land tenure, among the king the lord, and the vassals. The king still theoretically owned all lands within his domain. But he could not administer them directly. Moreover, due to the rising expenditures for defense against invading barbarians, aggravated by political spending, the king was forced to grant lands in return of immediate revenues (aids or contributions). Inevitably, the public domain was divided into numerous feudal jurisdictions (feifs) over which ruled, more or less independently, the feudal lords. The lords parceled the lands to sub-vassals or serfs to whom they granted permission to cultivate, accord protection, and administered justice. In return, the serfs cultivated the lord’s lands, served on special occasion, gave a part of their produce and paid taxes. One feature of the feudal system, the suzerain-lord relationship implied the responsibility of the feudal lords to support the king with revenues for the latter’s public expenditures. More often, the king was increasingly forced to subsist mainly upon the income from the property he directly owned. In addition, the king derived revenues from the bona vacantia.
The public functions of central government were usually confined to national wars and administration of royal domain. Due to the weakening of central authority and its limited to finance its public functions, public concerns became de facto responsibilities of the feudal lords. Government functions and inevitably public finance were parochialized.
The feudal lord became an active fiscal manager. He assessed and collected taxes from his serf. He levied license fees on merchants and traders who passed by his manor. He collected gross produce taxes, inheritance taxes and marriage fees for the upkeep of his court. Tolls on rivers, bridges or roads were levied. He also collected aids when his eldest son was knighted or his eldest daughter married when he set on crusades, and when the king requested contributions on emergencies.
Where some national taxes were retained under the central government, revenue assessment and collection were confusing and in disarray due to the absence of central accounting system and record-keeping. In effect, the central government or monarchy relied more and more on the feudal lords as local revenue agents.
Revenue raising and expenditures occurred at two levels-at the level of the king or the central government and at the level of the feudal lords. During this period, most of the traditional functions and prerogatives of the king were assumed by the feudal lords. The latter provided the basic services and in the processed collected most of the taxes. The king was mainly involved in national wars and administration of his demesne. The feudal system and its mode of taxation was transported by the European countries to their colonies.
Beginning of Capitalism and the Rise of the Central Government
The modernization of public finance at the national level developed simultaneously with the rise of the central government. The requirements of strong central governments included the expansion and rationalization of national finances. The growing cost of government compelled the post-feudal states to raise more revenues. The return of the national revenue powers to central government led to expansion of the traditional national taxes and the introduction of the new ones.
The taxes introduced during the post-feudal era were very numerous. Some of them were poll tax, hearth tax, window tax, salt tax, and more.
The reemergence of central governments, particularly in Europe after their feudal period brought about significant changes in public finance institutions the income tax emerged as the major source of national revenue. A wide variety of indirect taxes was also introduced. Also, the principle that taxes cannot be imposed without consent was integrated into the system. Accounting and audit institutions developed in the course of increased demands for accountability. Public borrowing emerged as a major activity in public finance.
Mercantilism refers to those policies especially protectionist and monetary, which the European states pursued during 16th, 17th and 18th centuries in their efforts to enrich a great nation by trade and manufactures than by the cultivation and improvement of land, rather by industry of the towns than that of the country.
Regarding tax and revenue administration, the accumulation of specie (metal) enabled the central government to mint money for domestic use. The use of money, in turn facilitated the collection of taxes, custom duties and other revenues, thereby increasing collection and simplifying administration.
Internal taxation was used to control the agricultural sector, to support industrialization thrusts. Internal tariffs were commonly used to regulate food supply and products for exports. Thus high tariffs and low export rates were imposed when the agricultural sector produced an oversupply of goods.
To further monopolize trade, high customs fees and charges were imposed on foreign ships passing or docking at the mercantilist country.
Public expenditures at the time expanded enormously because of the wide-ranging mercantilist concerns of the government, the expansion of national government and bureaucracies, and the maintenance and protection of its ventures in the colonies. The accumulation of specie also gave rise to the development of a money economy which facilitated exchange and increase large-scale business activities.
To sustain expanding economic enterprise, the state actively allocated public funds to aid the industries. A huge part of the state budget was commonly allotted for capital infusion, subsidies, and public works.
Mercantilism had exerted many influences on public finance. First, it highlighted the necessity of state intervention in the economic life of the mercantilist country. Second, the mercantilist emphasis on fiscal instruments to guide economic activities towards prosperity, has broadened the uses of the tax and budget in the economic sphere. Third, the concern of the mercantile state to preserve to increase its bullions by aggressive exportation of home products and the corresponding restriction of imports through high tariffs evolve into a set of fiscal principles known as the “balance of trade”. Fourthly, the experience of mercantilism, exemplified by England and some Western States in the later part of the period, showed the mere acquisition of gold and silver was not the sole determinant of national wealth.
Cameralism, like mercantilism, was concerned with how to make the state powerful and wealthy. However, unlike the mercantilists who equally emphasized the accumulation of bullions through restrictive trade, cameralists were more partial to the development of a nation’s internal resources through efficient administration and control of economic activities. Physiocracy
The physiocrats were generally concerned with taxation and its stability and certainty. They agreed that the only way to institute a stable system of taxation was to base it on a sector which produced a net profit or surplus. Through their analysis of the shifting and incidence of tax burden, physiocrats held that agriculture alone produced a surplus which formed the basis for taxation. To ensure the certainty of revenues, physiocrats argued, all existing taxes should be abolished and a single direct tax on the land-rent income accruing from agricultural surplus which sustained the flow of income and goods in the economy, was the best foundation for a lasting system of taxation.
Economic relationships changed from land-based transactions to industrial relationships; from the relationship of the feudal lord and tenant, to that of the capitalist and the worker. Ideas about the nature and functions of the state correspondingly changed. So did ideas on public finance. The mercantilist philosophy of government intervention gave way to laissez faire policy of minimum interference. In the feudalism, the known world revolved around the feudal lord; in capitalism, the man of the hour was the capitalist and the entrepreneur.
Keynesian Public Finance
The economic depression of the late 1930’s changed all these views. To their dismay, economists realized that the industrial economies would not respond anymore to the prescriptions of the classical economists. They discovered that economies under the capitalist or free enterprise system are subject to cyclical fluctuations and to the ravages of inflation, stagnation and recession.
John Maynard Keynes insisted that the government could and should influence the prices of goods and services, amount and the consumption, the degree of employment and the distribution of national income through taxation, borrowings and purchase and sale of commodities and labor. Keynes developed the tool for correcting imbalances in the economy. He emphasized its importance as a stabilizing and compensatory tool. Keynes demolished the view that governmental activity should be limited only to a few basic activities; he insisted that public finance should go beyond mere working of the economy.
Thus, taxes for example would be imposed not just for the sole purpose of raising revenue but for economic objectives like influencing consumption and redistribution of income and wealth as well. Funds would be expected not only for the purpose of dispensing limited services but to affect the income and employment levels as well. Borrowings would be engaged in not merely to balance the budget but to fulfill economic objectives like mopping up expenses liquidity and transferring of resources from one sector to another. It could also be used to finance productive activities in instances where the private sector has been weakened and needs revitalization. Of all keynes’ public finance views, perhaps deficit financing was the most controversial at that time.
Keynes’ concept of aggregative economics or macroeconomics, and his basic terminologies-fiscal policy, monetary policy, deficit financing, compensatory financing-are now part and parcel of public finance vocabulary. These are standard tools which policy makers of mixed economies-whether the objective be stability or development.
Karl Marx roughly sketched out his conception of post-capitalist society. Communism could not be achieved immediately after the revolution, for “between capitalism and communist society lies the period of the revolutionary transformation of one into the other. There corresponds also to this political transition a period in which the state can be nothing but the revolutionary dictatorship of the proletariat.” The transition to communism would be marked by two central processes: First, the means of production would be owned by the society, and the products of human labor would no longer be directly appropriated by a single processing class. Since the division of society into classes was largely determined by ownership or non-ownership of the means of production, this would be gradually abolished, in the sense that there would no longer be a political instrument for class society” would society be able to “inscribe n its banners: from each according to ability, to each according to his needs.”
Marxist contribution to our understanding of society in general and political economy in particular has been immense. Marx’s stress on the economic factor in society and his analysis of classes have had great influence on public finance in modern times.
Basic Features of Socialist Public Finance
1. The primacy of Central Planning. Planning plays a crucial role in socialist public finance, in contrast to classic capitalist theory which places reliance on the market mechanism for the production and distribution of goods and servicer. 2. The Role of Taxation in Revenue-Raising. Unlike the mixed economies where taxation normally accounts for most government revenue, taxation normally accounts for most of government revenue, taxation plays a very minor role in socialist public finance. 3. Budget Deficits. It is claimed that budgets of socialist countries do not have deficits but have surpluses of revenue over expenditure. This feature is in sharp contrast with deficits in mixed economies which are regular features of the budget.
This ends the discussion on the history on fiscal administration cited in the book Philippine Public Fiscal Administration by Leonor Magtolis Briones.