QUESTION 1

a)
 Progressive Tax: As the name suggests, this is a tax regime in which the ratio of tax
liability to income or other tax base rises or increases as the income increases. This
implies that a greater percentage of income is taxed as income increases. Simply put, the
higher the income of a person, the higher the tax liability and the lower the income, the
lower the tax liability. This is a graduated form of taxation. A typical example of this type
of tax system is the graduated rate of tax applicable to individuals found in the First
Schedule of the Income Tax Act, 2015 (Act 896) as amended. It is quite equitable. It
helps redistribute income. The rich will bear more tax than the poor.
 Proportional Tax: In a proportional tax system or regime, the effective tax rate remains
fixed as the amount or income increases. That is, irrespective of one’s income or
expenditure, the tax rate is at the same percentage. Regardless, the rich and the poor
suffer the same rate of tax.
 Regressive Tax: Unlike a progressive tax, in a regressive tax system or regime, the tax
ratio falls as the income increases. Thus, it is the tax system which exacts a smaller
percentage of tax as income increases. This is the tax system that has less effect on the
rich than on the poor. A regressive tax is the opposite of a progressive tax system. Indirect
taxes are generally regressive. An example is VAT. It is not equitable. It does not help
redistribute income. The poor relatively bear more tax than the rich.

b) Direct taxes administered by the domestic tax revenue division

i. Corporate Income Tax
ii. Personal Income Tax
iii. Pay As You Earn (PAYE)
iv. Tax Stamp
v. Mineral Royalties
vi. Capital Gain Tax
vii. Gift Tax
viii. Rent Tax
QUESTION 2
a) Characteristics of a good tax system
Equity: Equity may mean fairness. However, fairness is inadequate in describing equity in
taxation. Equity seeks to ensure that taxpayers with the same circumstances, all things being
equal, are treated equally in tax payments.
Equity has two aspects to it:
 Horizontal equity, and
 Vertical equity.
Horizontal equity means people in the same circumstances should pay the same amounts
of tax. Thus, if both Ali and Baba earn the same salary, have the same benefits in kind
and are entitled to the same tax reliefs, then they should pay the same amount of income
tax, all things being equal. It would be inequitable if Ali paid more than Baba or vice
versa. This can enforce compliance.
Vertical equity is concerned with making the amount of tax different persons pay
proportionate to their ability to pay. Those who make more money should have a higher
tax-to-total income ratio than those who have lower incomes. If Willie made a profit of
GH¢360,000.00 per annum from the sale of Colombia brand powder while Julie’s annual
profit from her sale of Korle-Bu powder was GH¢ 12,000.00, it would be very reasonable
to expect Willie to pay a higher proportion of his income as tax than Julie. If those on
very low incomes paid proportionately the same amount of tax as the wealthy, the tax
system would not be fair.
Certainty: According to Adam Smith, the tax that an individual has to pay should be certain, not
the result of unique rules developed for each taxpayer. The taxpayer should be able to determine
in advance how much tax he has to pay, at what time he has to pay the tax, where he has to pay
it, and in what form the tax is to be paid to the government. This means that every tax system
should be certain to enforce compliance and enhance revenue mobilization. The other side to this
is that a good tax system should ensure that the government is also certain about the amount that
will be collected by way of tax. After all, it is by knowing in advance how much revenue will be
available to it and at what time that the government can plan what to spend on its development
agenda.
Convenience: The mode and timing of tax payment should, as far as possible, be convenient to
taxpayers. Adams Smith wrote: “A tax upon the rent of land or of houses, payable at the same
term at which such rents are usually paid, is levied at the time when it is most likely to be
convenient for the contributor to pay; or when he is most likely to have [the] wherewithal to
pay.” So, it should not be necessary for a person to borrow money to pay his tax because the
exactor calls for the tax at a time the taxpayer would have spent all the income on which is
levied. A convenient tax system will encourage people to pay their taxes and will ensure the State
receives the maximum possible amount of tax revenue. It may be added that convenience should
include how easily a taxpayer can reach the place of payment and make payment.
Economy: This principle states that there should be an economy in tax administration. The cost
of tax collection should be lower than the amount of tax collected. It may not serve any purpose
if the taxes imposed are widespread but are difficult to administer. Therefore, it would make no
sense to impose certain taxes if it is difficult to administer them.

b)
i. Automatic Stabilisers: Automatic stabilizers are economic policies and programmes
designed to offset fluctuations in a nation’s economic activity without intervention by
the government or policymakers on an individual basis. Thus, some tax and
expenditure programmes change automatically with the level of economic activity.
These are called Automatic Stabilizers. Automatic stabilizers refer to how fiscal
instruments (taxes and government spending) will influence the rate of growth and
help counter savings in the economic cycle. In a period of high economic growth,
automatic stabilizers will help to reduce the growth rate. With higher growth, the
government will receive more tax revenues; people earn more and so pay more
income tax (note the tax rate doesn’t change, the amount received just becomes
higher). 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 stabilizers will help to limit the fall in
growth. With lower incomes, people pay less tax, and government spending on
unemployment benefits will increase. This increase in benefit spending and lower
taxes helps to limit the fall in aggregate demand.

ii. 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. Tax revenue
depends on household income, the size of corporate profits, size and levels of
consumption among others. Government spending depends on government decisions
and the state of the economy. Discretionary government spending and tax policies can
be used to shift aggregate demand. For example, in a bid to resuscitate a depressed
economy, the government can spend more than it collects from taxes (expansionary
fiscal policy) in order to increase aggregate demand with its resultant multiplier effect
of increasing production, increasing income, wealth creation thereby rejuvenating the
economy from its depressed state.

c)
i. Monetary policy may be defined as control through the banking system of the money
supply, directly by a limit (target) on its growth; or indirectly by measures which affect the
cost and availability of credit, whereas fiscal policy acts through taxation and government
borrowing and spending. The aim of fiscal policy is to ensure full employment, stable prices
and a balance of payments surplus.
Fiscal policy is a policy enacted by the legislative branch of government. It deals with tax
policy and government spending. Monetary policy is enacted by a government's central
bank. It deals with changes in the money supply of a nation by adjusting interest rates,
reserve requirements, and open market operations.

ii. Tools of monetary policy are as follows

 Directives
 Interest Rates
 Open Market Operation
 Cash Ratio or Liquidity Reserve Requirements
 Special Deposits
 Moral Suasion
QUESTION 3
a) Features of direct tax and indirect tax

Direct Tax Indirect Tax

Meaning Paid directly to the government
Paid to the government via
intermediary
Levied on Profits and income Goods and services
Taxpayer Individuals and businesses End-consumers of products, goods and
services.
Tax Rate Directly depends on income and Same for everyone
profits
Tax Burden Progressive Rate of tax is flat, so tax burden is
regressive
Transfer of Not transferable Can be transferable
liability
Tax Collection Complex Quite convenient
Types Income Tax and STT Goods and Services Tax (GST)
Evasion Possible Not possible
Economy Less economical More economical
Certainty More certain Less certain

b) “Deepening the Tax System” and “Widening the Tax System”

 Widening the tax system entails including instruments in the tax system that were
previously not in the system. This would include introducing new taxes (e-levy, COVID
Levy), subjecting people to tax who were previously exempt, for example, by lowering
the tax threshold, etc. Widening the tax base and system is, therefore, meant to increase
government revenue.
 Tax Deepening is when the government imposes taxes on the same people with respect
to the same taxable activity, for example, by increasing the tax rates or disallowing
deductions, this counts as tax deepening. Ghana Revenue Authority can deepen the tax
base simply by subjecting more gross income to taxation by eliminating or curbing tax
expenditures such as deductions, exclusions, credits, exemptions, and preferential
treatment of capital income over labour income. Tax deepening has value beyond raising
revenue. They would help the tax law adhere more closely to the principle of horizontal
equity, a core public finance and taxation theory concept stating that two people with the
same income should not pay significantly different effective tax rates based on the ability
to exploit tax law preferences or loopholes. With high levels of tax overload worldwide,
widening the tax base is no longer a viable option for most countries that have already
‘out-widened’ their tax bases. The remaining option would be to deepen the tax base,
which is by no means a viable option either.

c) Economic roles of taxation

 Raising revenue for public expenditure: Tax revenues are the most important source of
income for Governments. They enable governments to provide social services and
infrastructural facilities for the benefit of their citizens, such as the provision of good
roads, maintenance of law and order, defence against external aggression, and regulation
 of trade and business to ensure social and economic maintenance. The provision of these
social services and infrastructure goes a long way to reduce the total cost of operation of
a business. It means that businesses can expand their operations rather than striving to
provide these services and infrastructures for themselves. Without taxes, the governments
would not be able to provide basic services such as health, education, roads,
transportation, water etc. The provision of these services helps to improve the quality of
life of citizens of a country.
 Redistribution of income: Taxation can be used as a tool for equitable redistribution of
income. Through the institution of a progressive system of taxation, the wealthy are made
to contribute more to the “Taxation Fund” than the poor. Hence, the rich contribute more
to cushion the low-income earners. More so, tax income contributed by the rich is used to
provide social amenities which benefit the poor.
 Controlling inflation and deflation: Taxation can be used as a tool to control the level
of inflation or deflation. In a spiralling inflationary situation, taxes are increased to
reduce the disposable income in the hands of consumers, thereby reducing the amount of
money in circulation. This helps in mopping up the excess liquidity. Similarly, in a
deflationary situation, taxes are reduced to increase the disposal income of the
consumers, thereby increasing the volume of money in circulation.
 Redistribution of the location of industries: Taxation may be used to channel the
growth of the key sectors of the economy of a nation. Under the current tax laws of
Ghana, for example:
o Manufacturing companies cited in the regional capitals other than Accra and Tema
enjoy a tax rebate of 25%, while those located in non-regional capitals enjoy a tax
rebate of 50%.
o In the case of young entrepreneurs, tax rates applicable for the five years after the
initial concession at the rate of zero (0) percent would enjoy incentives as follows:
No. Location Tax rate
1 Accra/Tema 15%
2 Other regional capitals outside the three northern regions 12.5%
3 Outside other regional capitals 10%
Encouragement of investment in certain sectors of the economy
Under the Sixth Schedule of the Income Tax Act, 2015 (Act 896), the following concessions
are provided to encourage investment into those areas:
o Farming enjoys a tax holiday of 5 or 10 years, depending on the nature of the farming
activity engaged in.
o Real estate developers enjoy a holiday for 5 years.
o Venture capital firms enjoy a tax holiday of 5 years from corporate income tax,
dividends and capital gains.
o Privately owned universities shall be exempt from tax when they plough back a
hundred percent of their profit after tax into the business.
The growth in the key sectors of the economy may lead to the growth of the economy in
general, which may result in increased employment and improved standard of living.
 Control of budget deficit: Taxation may also be used as a tool to narrow budget deficits
or fiscal gaps. An efficient and effective tax administration may result in an increase in
tax revenue. This may have the effect of narrowing the budgetary deficit, resulting in
reduced government borrowing.
  Promotion of exports: Taxation may be used as a tool to promote exports. Under the
Income Tax Act 2015 (Act 896), companies engaged in the production and export of non-
traditional goods enjoy a concessionary tax rate of 8%. Also, under the VAT Act 2013
(Act 870), exports are zero-rated to make export products competitive in the international
market. Non-traditional goods are defined under the First Schedule of Act 896 to include
Horticultural products, Processed and raw agricultural products grown in Ghana other
than cocoa beans, Wood products other than lumber and logs, Handicrafts, and Locally
manufactured goods. A Free Zone developer or an enterprise granted a license under the
Free Zones Act, 1995 (Act 504) is exempt from the payment of income tax on profits for
the first ten years.
 Discouragement of consumption of certain goods: Discriminatory Duties or Super
Taxes may be imposed to discourage the importation of certain goods either to conserve
foreign exchange or to discourage their consumption, for example, alcoholic beverages
and tobacco, by imposition of higher tariffs and import duties.
 Protection of infant industries: Indigenous industries, at their teething stage and with
high costs of production, face stiff competition from foreign goods imported into the
country. Import duties and tariffs are raised to protect these infant industries.
 Stimulation of economic growth: In times of depression in an economy, taxation can be
used as an instrument to stimulate growth. This can be done by reducing taxes to enable
companies to plough back or reinvest profits that would otherwise go into tax payments.
At the same time, a reduction in consumption taxes and individual taxes would help boost
consumption, thereby increasing economic growth.
 Attraction of foreign direct investment: Taxation can be used as an instrument to
attract foreign direct investments (FDIs). Taxation and tax incentives like tax holidays,
among others, can attract foreign investors to a country. This allows investors to fully
recoup their investments during such periods as well as reinvest them to operate on a
larger scale. This brings about economies of scale. Again, capital allowances provide
businesses the opportunity to recover the amounts they spend on capital expenditure. All
these will eventually result in an expanded economy and, thus, economic growth. Double
Taxation Agreements (DTAs), for example, provide relief from double taxation and also
may provide concessional tax rates in those agreements. For example, management and
technical service fees for non-residents are taxed at 20%. However, management and
technical service fees earned by non-residents from treaty countries are taxed at lower
rates. E.g., France is 10%, the Netherlands is 8%, among others.

QUESTION 4
a) The following are the arguments in favour of the use of public debt as an alternative to
taxation:
i. Public debt enables the government to facilitate growth take-offs by inventing a
critical mass of infrastructural projects and social sectors of the economy where
taxation capacity may be limited. Public Debt for financing fruitful investment
produces supplementary, creative capability in the financial system, which else would
not have been achieved.
ii. Tax becomes a disincentive after a certain point. Taxation beyond a certain limit tends
to affect economic activity adversely owing to its disincentive effect. It does not have
any unfavourable repercussions on economic activity by being disincentive, partly
 because of its voluntary nature and partly because of the expectation of return and
repayment.
iii. Public debt supports tax smoothing. Public debt facilitates tax smoothing and counter-
cyclical fiscal policies, which are essential for reducing output volatility.
iv. Helps align costs with benefits. It permits an equitable alignment of benefits and costs
for long-gestation projects by shifting taxation away from current generations.
v. When debt is applied well, it improves the standard of living public debt can improve
the standard of living of the citizenry of a country, whilst Taxation increases the cost
of living of citizens. This is because public debt allows the government to build new
roads and bridges, improve education and job training and provide pensions. This
enables citizens to spend more now instead of saving for retirement, which further
boosts economic growth.
vi. Public debt attracts foreign investments. Public debt is a safe way for foreigners to
invest in a country’s growth by buying government bonds. This is much safer than
foreign direct investment. For example, about 95% of the $ 2.5 billion bond issued by
the government of Ghana in 2017 was subscribed by foreigners.
vii. In emergency situations. When Ghana first recorded the two (2) COVID-19 cases, we
immediately applied for a loan to combat the COVID-19 pandemic. The World Bank
provided $100 million to Ghana to assist the country in tackling the COVID-19
pandemic. This $100 million was made available to the government and the people of
Ghana as short-term, medium-term and long-term support.
b) Structural and classification of taxes in Ghana
 Based on the method used for the calculation of the tax or Based on the mode of
Imposition
o Proportional Tax: Here, tax is levied at a fixed rate on the amount of income earned.
A proportional tax is a tax whose burden is the same rate regardless of the income
earned by the household. For example, under a proportional tax system, if the income
tax rate is 10%, then a household that earns GH¢10,000 will pay 10% of their income
in taxes, while a household that earns GH¢10 million will also pay 10% of their
income as taxes.
o Progressive Tax: Here the rate that is used to calculate the amount of tax is
determined by the person’s total income. The bigger the person’s income the more tax
he will pay. A progressive tax is a tax that takes a higher percentage of income from
higher-income households than from lower-income households. The current income
tax system in Ghana on PAYE is a progressive tax. For example, under a progressive
tax system, a household that earns GH¢10,000 would pay a 5% income tax while a
household that earns GH¢10 million would have to pay a 35% income tax.
o Regressive Tax: This is where the tax rate reduces as the person’s total incomes gets
bigger. This type of tax does not exist in most countries, but a typical excise tax is
regressive.
 Based on who has the responsibility to pay the tax
o Direct Tax: In this case, the impact and incidence of tax falls on the same person.
Direct taxes are taxes on income. A Direct tax is a kind of charge which is imposed
directly on the taxpayer and paid directly to the government by the person. The
burden of direct tax is one that cannot be shifted by the taxpayer to someone else.
 Examples of Direct Taxes are personal income tax from labour, interest, etc Company
tax, Property tax, Stamp duties, and Rent tax.
o Indirect Tax: Here, the impact and incidence of the tax falls on different people.
Indirect taxes are taxes on spending. It is a tax collected by an intermediary (such as a
retail store) from the person who bears the ultimate economic burden of the tax (such
as the customer). An indirect tax is one that can be shifted by the taxpayer to someone
else. This kind of tax may increase the price of a good so that consumers are paying
the tax by paying more for the products. Examples of Indirect Taxes are Export and
import tax, Excise tax, Surcharges, Entertainment tax, licenses, Value added tax, and
Petroleum tax.
 Based on the Mode of Collection
o Withholding
o Instalment
o On Assessment
c) Conditions necessary for budget deficit financing or causes of deficit financing
i. During a Period of Depression: Deficit financing assumes greater importance when
there is the need to recover after a major depression or to reduce the severity of the
business cycle. This happens when there is the realization that private sector
activities, as well as traditional monetary policies, prove inadequate in restoring
economic stability. When economic activities are declining or stagnant, deficit
financing may replace deficiency in aggregate demand by injecting funds and
providing the necessary stimulant for reducing under-utilization of resources and
increasing the deployment of labour and capital through additional spending to
finance the budget deficit.
ii. During Wars: Governments try to raise additional resources to finance tribal
conflicts during tribal wars. This may, however, have negative effects on inflation,
etc.
iii. During a Process of Economic Development: Usually, in developing countries,
deficit financing is applied to cater to the meagre voluntary investment in order to
progress rapid development to do away with the vicious circle of poverty (low
savings, low investment, low income, etc).
iv. Ineffective Financial Management: Since budgetary projects in developing
countries are not reliable, management also tends to be ineffective, and this leads to
demand for loans, grants and aid to finance ineffective programmes.
v. Weak Expenditure Control and Monitoring: The annual accounts are usually in
arrears in such a way that year-by-year comparison is difficult. Besides the
unpredictable economic and social environment, the government may incur
expenditures outside the budget, which necessitates the inflow of budget expenditure
in excess of expected revenue.
vi. Low Revenue Mobilization: The revenue or tax net does not encapsulate all taxable
enterprises and individuals. Revenue from taxes, therefore, tends to be less than what
is needed for payments of goods and services and other government current financial
obligations.
vii. Political Pressure: Politicians make electioneering promises which have not been
budgeted for. When political pressure becomes unbearable, there are attempts to
 implement policies (not budgeted for) to earn political integrity. These create extra
burdens, needing extra funds to finance outside the budget.
viii. Infrastructural Development
ix. To keep government workers productive by paying them
x. Enhance economic livelihood through Livelihood Empowerment Against Poverty
(LEAP)
xi. Provide social goals: The theory of social goods is of prime importance to the
economies of the public sector. Some economists divide social goods under two
heads: Social and economic overheads. Social overheads like hospitals, schools,
colleges and technical institutions and economic overheads like roads and railways,
irrigation and power projects, etc., are all essential for economic development. It is
the responsibility of public expenditure to build up sound social and economic
overheads, as money for these things does not usually come from private sources.
xii. Increase Production: Public expenditure contributes to production through a large
number of public enterprises, both in industries and agriculture. The government
incurs a lot of expenditure in the agricultural sector, e.g., on irrigation and power,
seed forms, fertilizer factories, warehouses, feeder roads, etc., and in the industrial
sector by setting up public enterprises like steel plants, heavy electrical, heavy
engineering, machine-making factories, etc. All these enterprises are calculated to
promote production and, thereby, economic development.
xiii. Promote Price Stability: An increase in public expenditure relieves the economy
from the quagmire of depression, and conversely, public expenditure can be scaled
down when there is a fear of an inflationary rise in prices. Thus, public expenditure
helps in stabilizing prices, especially where the economy is in a depressed state.
xiv. Create employment: Public expenditure is the most potent weapon to fight
unemployment. The level of employment depends upon aggregate demand. The
government can influence effectively either by making more public expenditure or by
resorting to such fiscal methods as may raise the level of private expenditure. Thus, as
the government spends to resuscitate the economy from a depressed state, it tends to
create employment opportunities resulting from the multiplier effect of government
expenditure.
xv. Promote Balanced Growth: There is a tendency to use economic resources for the
further development of already developed regions. However, for overall growth,
special attention needs to be paid to the development of backward areas and
underdeveloped regions. This requires huge amounts for which reliance must be
placed on public expenditure.
xvi. Reduce Inequality of Income: Another objective of public expenditure is to reduce
the inequality of income. Expenditure on old age pensions, unemployment relief, free
education, free midday meals, etc., benefits the poorer classes of the community at
the expense of the rich. The above objectives reveal that public expenditure is
properly of utmost importance for social welfare and economic prosperity.
xvii. Exploitation and Development of Mineral Resources: Minerals provide a base for
further economic development. The government has to undertake schemes for the
exploitation and development of essential minerals, e.g. coal and oil. Thus, public
expenditure must play its role here too.
QUESTION 5
a)
MEMO
To: Chief Director, Ministry of Finance
From: Head of Policy Unit
Date: 5th March, 2025
Subject: BENEFITS OF FOREIGN DEBTS OVER DOMESTIC DEBTS
Introduction
In response to your request on the above subject, I present my report to you on the benefits of
external borrowing over domestic borrowing. The benefits of external borrowing over domestic
borrowing are as follows:
i. The government can carry out its projects successfully as loans from foreign sources
can be acquired in large chunks.
ii. The government can use loans from foreign sources to support local firms that
otherwise will not be able to acquire in view of collateral and/or credit rating.
iii. The cost of doing business will not be high. The private sector can borrow within to
expand their businesses as they have less competition from the government.
iv. There are times when external borrowers serve as useful advisors on the plausible use
of borrowed funds.
v. It serves as an additional source of cash inflows to support the government’s overall
development agenda.
Conclusion
I hope this will meet your request.
Humbly Submitted
Signed

b) How the government of Ghana could use contractionary fiscal policy to fight
inflation
Contractionary fiscal policy is a form of fiscal policy that involves increasing taxes, decreasing
government expenditure or both in order to fight inflationary pressures. Due to an increase in
taxes, households have less disposable income to spend. Lower disposable income may result in
decreases in consumption. Contractionary fiscal policy decreases the level of aggregate demand
by decreasing consumption, investments and government spending, either through cuts in
government spending or increases in taxes.

c) Expansionary fiscal policy of increased government spending (G) to increase aggregate

demand (AD) may cause “Crowding out”. Crowding out occurs when increased
government spending results in a decrease in the size of the private sector.
 For example, if the government increase spending it will have to increase taxes or sell
bonds and borrow money, both methods reduce private consumption and investment.
If this occurs, AD will not increase or increase only very slowly.
 Also, classical economists argue that the government is more inefficient in spending
money than the private sector, therefore, there will be a decline in economic welfare.
 Increased government borrowing can also put upward pressure on interest rates. To
borrow more money, the interest rate on government securities may have to rise,
causing slower growth in the rest of the economy.
 Government excessive borrowing from commercial banks increases interest rates
making it difficult for the private sector to secure loanable funds and thus increasing
the cost of doing business.
MCQs
1. d
2. b
3. b
4. c
5. d
6. c
7. c
8. d
9. b
10. b
11. a
12. c
13. e
14. c
15. a
16. b
17. a
18. c
19. b
20. b
21. b
22. d
23. d
24. e
25. d
26. b
27. c