Sources of Government Funds

T A X

Interest in Deposits BSP and Commercial Banks

Grants Foreign Government and Private Foundation

Sold Government Assets

Why is there TAX?

Protection

Welfare and Well-Being

LAWS Formulate, Implements and Interpret

Concepts on TAXATION

Benefits Principle

Ability to Pay Principle

Kinds of TAX Ability to Pay

Inheritance Tax

Income Tax

How TAX is paid

Direct Tax

Indirect Tax

Progressiveness of Taxes TAX BURDEN

IMPACT

INCIDENCE

More Kinds of TAX TAX BURDENS

Regressive

Proportional Taxation

Progressive

FISCAL POLICY – THE RAPPERS Althea Rendal

Topics  Measuring Income Distribution Equality  Uses of Government Funds  Income Determination and Government  New Equilibrium  New Multiplier  Automatic Stabilizer  Rigidity in Government Spending

Measuring Income Distribution Equality

Lorenz Curve  Shows what percentage of total income goes to the lowest 10% income class, the next decile and so on.

Gini Index (Distribution of Family Income)  Philippines  45.8 (2006) 46.6 (2003)  Singapore  47.8 (2009) 48.1 (2008)  United States  45 (2007) 40.8 (1997)  China  41.5 (2007) 40 (2001  Germany  27 (2006) 30 (1994)  Hungary  24.7 (2009) 24.4 (1998)  Namibia  70.7 (2003)  Source: The World Factbook,

Use of Government Funds  Economic Services  Agricultural, trade and industry, power and energy, transport and communication sectors  Social Services  Education and Health Services  Defense  National Security  General Public Services  Government branches, departments, agencies  Interest Payments

Income Determination with Government

New Equilibrium  (1) Y = C + I + G  where : I and G are autonomous inflows  (2) C = b + c Y  where: Yd = disposable income and  (3) Yd = Y – T  Taxes depend on the level of income, so the tax function very similar to the savings function

 (4) T= s + tY  Where T= taxes  s = the level of taxes if y=0  t = Marginal Propensity to Tax (MPT) Ex. The change in the level of taxes corresponding to a change in the level of income, or change in T/ change in Y

 Substituting, we get:  (5) Y = b + c (Y-T) + I + G  (6) Y = b + C [Y – (s + tY)] + I + G

New Equilibrium with Govt and Taxes  (7) Y = 1. X (b – cs + I + G) 1 – c + ct

 Example…

New Multiplier  Multiplier (w/ G, T) = c + ct

Rigidity in Government Spending  Govt MUST Cut Down Spending  But WHERE?  There is always a TRADE OFF.  Address Debts  High Interest Expense  Minimize Corruption  Strong Political Will

Relative In Taxation Flexibility

OF FISCAL DEFICITS DEMAND and Output

1 2 3 WAYS DOMESTIC MONEY MARKET

BORROWING FROM THE BSP

BORROWING FROM THE DOMESTIC MONEY MARKET Normal Route Issuing Treasury Bills and Treasury Notes or other debt instruments Crowding effect

BORROWING FROM ABROAD

FISCAL POLICY AND GROWTH

TAXATION AND GROWTH Tax effort Tax Reform

TAX EVASION - not paying taxes correctly - illegally

Government fund = Therefore..

Inventing more types of taxes and Increasing tax rates More efficient way of tax collection

Government spending and growth

HOW TO SPEND TAX MONEY BETTER Public investments – Allow markets to widen – allows the operation of the economies of scale Education - investment in human capital

Bloated bureaucracy -(2008) 36% of national government spending= salaries and benefits of government personnel: Attrition Law of some are underpaid : Salary Standardization Law

Interest payments -Lessen the amount available for necessary services/infrastructures THEREFORE.. and

INCREASING PRODUCTIVITY Shift in aggregate supply to the right = growth with minimal inflation

EFFICIENT RESOURCE ALLOCATION tax on undesirable activities tax exemptions and subsidies to activities important for continued development Agriculture Promote achievement of economies of scale provide adequate educational facilities