Write a word paper in which you analyze capital sources of public funding and debt. Discuss the following types of debt in your paper:
?General obligation and revenue bonds
?Certificates of obligation
Capital Funding and Debt
Public funds refer to the revenue that the federal government generates through several ways to cater for activities that are beneficial to the public. These activities include building infrastructure, funding education, healthcare, community development, environmental development and other services public funds are not meant for personal benefit. However, some public expenditure leads to personal benefit for example salaries. There are two categories for sources of government funds. These are tax and non tax revenues. The biggest source of revenue is through taxes. A tax is a compulsory fee that is required by the law and collected by the government to fund public expenditure.
There are agencies that are responsible for collecting the tax in every country. Some of the common tax revenues include income taxes, value added tax, excise duty among others. There are also taxes on international business transactions and trade like import and export duties among others. The main goal that the government intends to achieve through tax collection is to eradicate poverty, improve the living standards of the people and achieve economic growth. Non tax revenues are earned through collection of fees and fines, registration charges and license and profits obtained from government owned corporations (Ledesma, 2013).
Taxes are either classified as either direct or indirect. A direct tax is imposed directly on the individuals and is directly paid to the government by the tax payers. This form of tax cannot be transferred from one tax payer to another person. On the other hand, indirect tax is the form of tax collected by intermediaries such as a store from the person responsible for the tax burden. Indirect tax can be transferred from one tax payer to another.
Types of direct taxes
Income tax is a type of tax which is imposed on the income of individuals. It is also imposed on cooperative societies or firms or trusts which are associations of individuals. In most countries, income tax is the major source of revenue. This tax is calculated differently for people in different income brackets.
Corporation tax is levied on profits made business organizations and companies. This is tax usually proportional and is levied at a constant rate. This tax is paid on profits either obtained from conducting business, on assets sold for more than they initially cost, and on investments. In some countries, companies that drill oil and natural gas pay petroleum revenue tax on their profits.
Property tax is paid by land and buildings’ owners. Collection of property tax is delegated by the national governments to local authorities who clearly identify the valuation method applied, the rates and procedures of collection. This form of tax is paid annually and exempts vacant land from being assessed. Forms of this tax vary in different countries.
Capital gains tax is levied on profits obtained from selling non inventory assets that was initially bought at a lower price. Most capital gains are obtained from the sale of bonds, stocks, property or precious metals. This tax is not implemented in all countries and different rates are applied for corporations and individuals.
Estate tax is levied on the total value of money, estate and property of a deceased person.
Types of indirect taxes
Customs duty is a tax that applies to imports and exports. The taxes are influences by cities and countries that have seaports. Although this form of tax is unknown to many consumers who consume exported or imported products, manufacturers and business merchants usually pass this burden to them by raising products’ prices. This reduces the tax they pay for raw materials or final products. In most countries, this form of tax was initially imposed in order to control the import or export of illegal goods (Johnson, 2016).
Excise taxes are usually paid by manufacturers on the raw materials they buy. Many manufacturers see this as the cost of conducting business. They later pass on the burden to the consumers on the final products.
Sales tax is a certain percentage of the purchases that people make on a daily basis mostly for domestic use. This is imposed by both state and federal governments. The rates for these taxes vary in different states and countries. The tax is collected and handed to the state of federal government to fund their projects and programs.
Value Added Tax (VAT) is levied on movable goods and is applied on value addition at every stage of purchase in the manufacture, packaging and distribution chain. This means that the value of the goods increases at the different stages of production or distribution before they are finally sold. VAT is levied to the consumers of goods and services.
Debt refers to the total borrowings that a country owes to its lenders. The lenders can be other governments, businesses or individuals. Public debt also refers to external debt owed to foreign investors. Public debt may include bonds, treasury bills, special loans, notes. Governments borrow in order to cater for a budget deficit, to meet expenses incurred during disastrous situations such as war or to fund development activities. Public debt is good because it enables countries to achieve economic development using the additional funds. It also allows foreign investors to invest in growing economies through buying government bonds. On the other hand, sometimes public debt has negative impact. Some governments borrow too much to make sudden economic growth and impress voters. Investors in such counties demand higher interest rates because of the high risks involved (Grennes, Caner, & Koehler-Geib, 2010).
General obligation and revenue bonds. General obligation bonds are securities issued by a government having taxing power in full faith and credit. This means that the bonds can be repaid by any necessary means. They are issued in order to fund capital development projects and the government can use its taxing to make sure it is paid back. Revenue bonds are different in that they are paid using the revenue realized from the projects funded by the bonds. Revenue bonds finance projects such as transportation, water, sewer, power systems among others.
Certificates of obligation refers to a form of debt that governing councils take to cater for emergencies and there is no time to seek voters’ approval. The funds are mostly used to ensure that things still run smoothly amidst the emergency.
Contractual obligations refers to obligations from one government to another that are made to liabilities in future after meeting the terms of the agreements or contracts. Contractual obligations are different from liabilities since there is no record of past events or transactions that gives the government an obligation to sacrifice economic proceeds in the future at a date specified in the financial statement. Thus, the government is not in debt until the event or transaction happens (Kirchhoff, 2016).
Commercial paper is a short term and unsecured debt issued by a large corporation in order to finance inventories, accounts receivable ant pay short term liabilities. Commercial paper has a fixed maturity of not more than two hundred and seventy days and is given on a discount relating to interest rates in the market. Only firms with good credit ratings from a reliable credit rating agency can be able to issue commercial paper at a good price since it is not collateral backed.
A capital lease is a lease that resembles asset ownership in terms of economic characteristics. A capital lease is viewed as assets for accounting reasons unlike an operating lease which is considered as rental or a true lease. A choice between the two forms of leases impacts the financial statements of a firm.
Notes payable refers to a ledger account where all company records of the amounts of promissory notes issued are kept. The amounts of unpaid promissory notes are recorded as company liabilities and are either reported as long term or short term debts on the balance sheet. The company should also have a record of pertinent information regarding owed amounts. These may include maturity dates, interest rates, collateral pledged among others.
Kirchhoff, H. (2016). The Difference Between General Obligation Bonds & Revenue Bonds. Finance.zacks.com. Retrieved 28 July 2016, from http://finance.zacks.com/difference-between-general-obligation-bonds-revenue-bonds-1303.html
Grennes, T., Caner, M., & Koehler-Geib, F. (2010). “Finding The Tipping Point — When Sovereign Debt Turns Bad”. Policy Research Working Papers. http://dx.doi.org/10.1596/1813-9450-5391
Johnson, C. (2016). Types of Indirect Taxes. People Of Our Everyday Life. Retrieved 28 July 2016, from http://peopleof.oureverydaylife.com/types-indirect-taxes-1461.html
Ledesma, B. (2013). Sources of funds for the national government. Slideshare.net. Retrieved 28 July 2016, from http://www.slideshare.net/BenedickLedesma/sources-of-funds-for-the-national-government