The income of the government through all sources is called public income or public revenue.
According to Dalton, however, the term “Public Income” has two senses wide and narrow. In its wider sense it includes all the incomes or receipts which a public authority may secure during any period of time. In its narrow sense, however, it includes only those sources of income of the public authority which are ordinarily known as “revenue resources.” To avoid ambiguity, thus, the former is termed “public receipts” and the latter “public revenue.”
As such, receipts from public borrowings (or public debt) and from the sale of public assets are mainly excluded from public revenue. For instance, the budget of the Government of India is classified into “revenue” and “capital.” “Heads of Revenue” include the heads of income under the capital budget are termed as “receipts.” Thus, the term “receipts” includes sources of public income which are excluded from “revenue.”
In a modern welfare state, public revenue is of two types, tax revenue and non-tax revenue.
A fund raised through the various taxes is referred to as tax revenue. Taxes are compulsory contributions imposed by the government on its citizens to meet its general expenses incurred for the common good, without any corresponding benefits to the tax payer. As Taussig puts it, “the essence of a tax, as distinguished from other charges by government, is the absence of a direct quid pro quo between the tax payer and the public authority.”
Seligman defines a tax thus: “A tax is a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all, without reference to specific benefits conferred.
The main characteristic features of a tax are as follows:
- A tax is a compulsory payment to be paid by the citizens who are liable to pay it. Hence, refusal to pay a tax is a punishable offence.
- There is no direct, quid pro quo between the tax-payers and the public authority. In other words, the tax payer cannot claim reciprocal benefits against the taxes paid. However, as Seligman points out, the state has to do something for the community as a whole for what the tax payers have contributed in the form of taxes.
“But this reciprocal obligation on the part of the government is not towards the individual as such, but towards the individual as part of a greater whole.”
- A tax is levied to meet public spending incurred by the government in the general interest of the nation. It is a payment for an indirect service to be made by the government to the community as a whole.
- A tax is payable regularly and periodically as determined by the taxing authority.
Taxes constitute a significant part of public revenue in modern public finance. Taxes have macro-economic effects. Taxation can affect the size and mode of consumption, pattern of production and distribution of income and wealth.
Progressive taxes can help in reducing inequalities of income and wealth by lowering the high income group’s disposable income. By disposable income is meant the income left in the hands of the tax payer for disbursement after tax payment. Taxes imply a forced saving in a developing economy. Thus, taxes constitute an important source of development finance.
Public income received through the administration, commercial enterprises, gifts and grants are the source of non-tax revenues of the government.
Thus, nontax revenue includes:
(i) Administrative revenue
(ii) Profit from state enterprises
(iii) Gifts and grants
Under public administration, public authorities can raise some funds in the form of fees, fines and penalties, and special assessments.
Fees are charged by the government or public authorities for rendering a service to the beneficiaries. To quote Seligman, “A fee is a payment to defray the cost of each recurring service undertaken by the government, primarily in the public interest, but conferring a measurable advantage to the payer.”
Court fees, passport fees, etc., fall under this category. Similarly, licence fees are charged to confer a permission for something by the controlling authority, e.g., driving licence fee, import licence fee, liquor permit fee, etc. Fees are to be paid by those who receive some special advantages. Generally the amount of the fee depends upon the cost of services rendered.
Fees are a bye- product of the administrative activities of the government and not a payment for a business. Thus, fees are distinct from prices. Prices are always voluntary payments, but fees are compulsory contributions, though both are made for special services. Sometimes a fee contains an element of tax when it is charged high in order to bring revenue to the exchequer e.g., a licence fee.
Fines and Penalties:
Fines and penalties are levied and collected from offenders of laws as punishment. Here the main object of these levies is not so much to earn an income as to prevent the commission of offences and infringement of laws of the country. Fines and penalties are arbitrarily determined and have no relation to the cost of administration or activities of the government. Hence, collections from such levies are insignificant as a source of public revenue.
“A special assessment,” as Seligman points out, “is a compulsory contribution levied in proportion to the social benefits derived to defray the cost of a specific improvement to property undertaken in the public interest.” That is to say, sometimes when the government undertakes certain types of public improvements such as construction of roads, provision of drainage, street lighting etc., it may confer a special benefit to those possessing properties nearby.
As a result, values of rents of these properties may rise. The government, therefore, may impose some special levy to recover a part of the expenses so incurred. Such special assessment is levied generally in proportion to the increase in the value of the properties involved. In this respect, it differs from a tax.
In India, these special assessments are referred to as “betterment levy.” Betterment levy is imposed on land when its value is enhanced by the construction of social overhead capital such as roads, drainage, street- lighting, etc. by the public authority in an area.
Profits of State Enterprise:
Profits of state undertakings also are an important source of revenue these days, owing to the expansion of the public sector. For instance, the central government runs railways. Surplus from railway earnings can be normally contributed to the revenue budget of the central budget.
Likewise, profits from the state transport corporation and other public undertakings can be important sources of revenue for the budgets of state governments. Similarly, other commercial undertakings in the public sector such as Hindustan Machine Tools, Bokaro Steel Plant, State Trading Corporation etc. can make profits to support the central budget.
Earnings from state enterprises depend upon the prices charged by them for their goods and services and the surplus derived therefrom. Thus, the pricing policy of state undertakings should be self-supporting and reasonably profit-oriented. Again, prices are charged with an element of quid pro quo i.e., directly in proportion to the benefits conferred by the services rendered.
A price is a form of revenue derived by the government by selling goods and services of public enterprises. Thus, price is the revenue obtained from business activity undertaken by the public authorities. Many public enterprises like postal services run on cost-to-cost basis. The prices are charged just to cover the cost of rendering such services.
However, in certain cases, when the state has an absolute monopoly, prices having a high profit element are charged. Such monopoly profits of a state enterprise are in the nature of a tax. The difference between price and fee is this: the former usually can never be less than the cost of production or service, while the latter may not necessarily cover the cost of service.
Gifts and Grants:
These form generally a very small part of public revenue. Quite often, patriotic people or institutions may make gifts to the state. These are purely voluntary contributions. Gifts have some significance, especially during war time or an emergency.
In modern times, however, grants from one government to another have a greater importance. Local governments receive grants from state governments and state governments from the centre. The central government gives grants- in-aid to state governments in order to enable them to carry out their functions. When grants are made by one country’s government to another country’s government it is called foreign aid. Usually poor countries receive such aid from developed countries, which may be in the form of military aid, economic aid, food aid, technological aid, and so on.
Classification of Public Revenue:
Different economists have classified the sources of public revenue differently. A scientific classification enables us to know in what respects these various sources resemble one another and in what ways they differ. Of the various classifications of public revenue available in economic literature, we shall review a few important ones.
Seligman classifies public revenue into three groups:
(i) Gratitious revenue
(ii) Contractual revenue
(iii) Compulsory revenue
Gratitious revenue comprises all revenues such as gifts, donations and grants received by the public authorities free of cost. They are entirely of a voluntary nature. Further, these are very insignificant in the total revenue.
Contractual revenue includes all those types of revenue which arise from the contractual relations between the public authority and the people. Fees and prices fall into this category. A direct quid pro quo is usually present in these types of revenue.
Compulsory revenue includes income derived by the state from administration, justice, and taxation. Taxes, fines and special assessments are regarded as compulsory revenue. These revenues express an element of state sovereignty. It is the most significant type of public revenue in modern times.
Dalton provides a very systematic, comprehensive and instructive classification of public revenue. In this opinion, there are two main sources of public revenue — taxes and prices. Taxes are paid compulsorily whereas prices are paid voluntarily by individuals, who enter into contracts with the public authority. Thus, prices are contractual payments.
Taxes are sub-divided into: (i) Taxes in the ordinary sense; (ii) Tributes and indemnities; (iii) Compulsory loans, and (iv) Pecuniary penalties for offences.
Prices are sub-divided into: (i) Receipts from public property passively held such as rents received from the tenants of public lands; (ii) Receipts from public enterprises charging competition rates; (iii) Fees or payments charged for rendering administration services, such as birth and death registration fees, and (iv) Voluntary public debt.
To these two groups must be added another group to make the classification exhaustive. Under this group, the following items are included: (i) receipts from public monopolies, charging higher prices; (ii) special assessments; (iii) issue of new paper money or deficit financing; and (iv) voluntary gifts.
The most logical and scientifically based classification of public revenue is however provided by Taylor. He divides public revenue into four categories:
(i) Grants and gifts
(ii) Administrative revenues
(iii) Commercial revenues
Grants and gifts:
Grants-in-aid are the means by which one government provides financial assistance to another to enable it to perform certain specified functions, for example, education and health grants made to the states by the central government.
Grants- in-aid are the cost payments made by the grantor government and revenue receipts to the grantee, and no obligation of repayment is involved. Gifts are voluntary contributions from individuals or institutions for specific purposes. Grants and gifts are voluntary in nature and there is absence of quid pro quo to the donor.
Under this group, fees, licenses, fines and special assessments are included. Most of these are voluntary in nature and based upon the direct benefits accruing to the payer. They generally arise as a by-product of the administrative or control function of the government.
These are the receipts by way of prices paid for government produced goods and services. Under this group, postal charges, tolls, interest on loans of state financial institutions or nationalised banks, tuition fees of public educational institutions are included.
These are compulsory payments made to government without expecting a direct return of benefits. The taxes involve varying degrees of coercive powers.