Government performs various functions in the field of political, social and economic activities with a view to increasing social and economic welfare. For this government requires large amount of resources. The resources raised by the Government from different sources are called Public Revenues. It consists of tax revenue as well as non-tax revenue.
Taxes are the most important sources of public revenue. Taxes are compulsory payments to government without expecting direct benefit or return by the tax payer. Taxes collected by Government are used to provide common benefits to all mostly in form of public welfare services. Example: Income Tax, Sales Tax, Value Added Tax, etc.
The revenue obtained by the government from sources other than tax is called Non-Tax Revenue. The sources of non-tax revenue are:
A fee is charged by public authorities for rendering a service to the citizens. Unlike tax, there is no compulsion involved in case of fees. If someone wants some specific service, he/she needs to pay a fixed amount of money as fees. Examples of such fee are: fees for issuing of passport, driving licence, trade licence, the licence, etc.
Fines or Penalties
Fines or penalties are imposed as a form of punishment for breach of law or non-fullment or certain conditions or for failure to observe some regulations. Like taxes, es are compulsory payments without quid pro quo. Unlike taxes which are imposed to raise revenue for the Government, es are imposed as a form of punishment or to prevent people from breaking the law.
Surplus from Public Enterprises
The Government also gets revenue by way of surplus from public enterprises. In India, the Government has set up several public sector enterprises to provide public goods and services. Some of the public sector enterprises do make a good amount of profits. The profits or dividends which the government gets can be utilised for public expenditure. There is some sort of quid-pro-quo in the case of surplus from public enterprises. s is because, the public gets goods and services, and the government gets prices, and consequently prots from selling such goods and services.
Grants and Gifts
Gifts are Voluntary contributions by individuals or institutions to the government. Gifts are significant source of revenue during war and emergency. A grant from one government to another is an important sources of revenue in the modern days. The government at the Centre provides grants to State governments and the State governments provide grants to the local government to carry out their functions. Grants from foreign countries are known as Foreign Aid. Developing countries receive military aid, food aid, technological aid, etc. from developed countries.
Deficit means an excess of public expenditure over public revenue. This excess may be met by borrowings from the market, borrowings from abroad, by the central bank creating currency. In case of borrowing from abroad, there cannot be compulsion for the lenders, but in case of internal borrowings there may be compulsion. The government may force various individuals, firms and institutions to lend to it at a much lower rate than the market would have offered.
Taxes and Subsidies
Taxes and subsidies are two key policy instruments that a government uses to modify market outcomes. Taxes draw from while subsidies inject money into the expenditure stream. Subsidies as well as commodity taxes affect relative prices. Given other things, the relative price of a taxed good increases and that of a subsidized good falls. Subsidies are different from transfer payments, which are straight income supplements to individuals, who are normally the poor and the vulnerable. Providing minimum consumption entitlement to the poor by subsidizing the items consumed by them is an extremely important welfare dimension of fiscal policy. Subsidies can correct for the under-consumption of goods with positive externalities.
With the social benefits of a particular service or commodity exceeding the aggregate of private benefits to individual consumers, market solutions result in under- consumption and subsidies can make the necessary correction. However, the benefits can be maximized only when the subsidies are transparent, well targeted, and suitably designed for effective implementation without any leakages. Subsidies promote growth by increasing the level of critical inputs like health, education and infrastructure. Subsidies can also hinder growth by drawing away resources like water and power from more productive uses, and by causing allocation distortions.
Pure public goods, such as defence and law and order, have common characteristics of non-rivalry and non-excludability. Consumption of such a good by one citizen does not diminish the availability to another (non-rivalry), and no citizen is denied access to such a good (non-excludability). There are many other services, for example, roads, that do not clearly fall into exclusive categories of pure public or pure private goods. They have varying degrees of public ness and therefore belong to an intermediate category. The former category of pure public good is financed exclusively by the Government. Varying degrees of subsidy are provided by the Government for the second category of goods. Subsidies result from the Government's inability to recover its cost adequately in many of these activities.