Sources of Government Revenue

There are two major sources of public debt:

  • Public revenue
  • Public debt (government borrowing)

1) Public Revenue

This refers to the income that the government gets from its citizens. The government can raise its revenues through taxation or non-tax activities. This gives rise to tax revenue and non-tax revenue.

Tax Revenue

Taxation is considered the most important source of public revenue. A tax is a compulsory payment made to the government without any direct benefit to the individual or firm. Revenue raised through taxation is used for the benefit of everyone in the society. Taxes can be classified as either direct or indirect taxes. Examples of direct tax are income tax, corporation tax, capital gains tax, estate duty/inheritance tax. Examples of indirect tax are custom duties, exercise duties, sales tax and value added tax. In the year 2005/2006 88% of the government revenue was from taxes while only 12 % was from other sources. Income tax contributes the highest percent, followed by customs and excise, and then VAT.

Non Tax Revenues

Surpluses from public corporations: A public corporation is an organization in which the government has a stake in its ownership. Public corporation normally provides essential services at a fee to the members of the society, e.g. Kenya Pipeline Company, KBC, KB Standards, etc. When the revenue earned from the supply of these services is more than the expense incurred, the surplus is paid to the government.

Fines and penalties: The judicial system in the country is made of courts and tribunals which impose fines and penalties on individuals, firms and corporations that break the laws of the land. The money raised from the fines and penalties becomes public revenue.

Fees: The government renders some direct services to its citizens such as licensing of marriages, issuing birth certificates, permits, issuing and renewal of driving licenses. For such services a small fee is usually charged. Such fees are a source of public revenue.

Income from properties: The government owns many properties. These include homes for which rent is charged, land for which rates are charged and game parks where entry fees are charged. This also is a source of public revenue.

Interest earned from loan repayments: The government charges interest on loans borrowed by the public through its corporations e.g. Agricultural Finance Corporation, Kenya Industrial Estate (K.I.E) etc. This interest collected constitutes part of the public revenue.

Sale of real assets: The government may sell assets that belong to its parastatals and other state corporations as well as local authority assets. This may take the form of privatization of state corporations, sale of council assets and direct sale of government properties (e.g. vehicles, Grand Regency)

Royalties: These are payments to the government arising from the use of natural resources by companies and individuals e.g. in the use of mines and forests.

  • Dividends and profits earned from government direct investments
  • Escheats; if a person dies without a proper will and has no legal heirs, properties of such a person revert to state and may constitute part of public revenue

2) Public Debt (Government Borowing)

Public debt refers to a source of government revenue in which government borrows money internally and externally. National debts are debts which a state owes to its own subjects or to the nationals of other countries. Public debt is a source of government revenue. In the case of public debt the government has to pay interests and repay the principal to the public.

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