FISCAL POLICY AND TAXATIONAn Economic Perspective

Basic Fiscal Policy (FP) OptionsFP concerns itself with inflows (G) and outflows (taxes) towards economic stability and growthS + T = I + G refers to a condition of equilibrium and FP is the instrument in reaching thisFiscal Surplus G < T

Uses of Government FundsConsumption Expenditures salaries & wages, social investmentsCapital Outlays public works construction, infrastructure, new equipmentEconomic Services assisting particular industriesNational SecurityDebt Servicing

Sources of Public FundsNon tax revenues:*interest earned from deposits in the BSP or in commercial banks**grants from foreign governments*** grants from private foundations****proceeds from the sale of public assetsTaxes : Main Revenue Source

What is taxation?It is the principal source of revenues in financing government operationsTax revenues serves as the primary control in determining the level of GIn the Philippines, taxes pay for more than 80% of G

The Principles of TaxationFIRST : Towards equity or social justicetaxes withdraws purchasing power from society members Benefit Principle: those who pay the tax should benefit from the uses for which the tax is spent Ability-to-pay OR Sacrifice Principle: those who have greater income (or wealth) should pay a greater proportion than those with less income

Second Principle of TaxationAdministrative Ease of Tax Tax measures should be devised so that it can be implemented with ease and at low cost

Third Principle of TaxationAdequacy of Revenue

To be worth the effort, a tax should yield sufficient revenueA tax that collects less revenue than the cost of administering it is a nuisance

Other AspectsSome taxes are aimed at discouraging the use of a commodity or a service EXAMPLE: a high tax on tobaccoSome taxes act as a subsidy ( i.e., tax relief) and act as an incentive to encourage a particular activity

Keep in mind!!Taxes affect the allocation of resources or of a specific activityTaxes not only add to public revenues but have effects on economic activity and on the redistribution of income in the economyTax Revenue = Tax Rate x Base* Base = Object of that Tax

What are the different types of taxes?A progressive tax increases as the base increases EXAMPLE: Income Tax & other personal and business taxesA proportional tax has a fixed proportion on the baseEXAMPLE: the VATA regressive tax stays the same or decreases as the base increases in value

What are the different tax systems?A progressive tax system has an income redistribution effect from high to low-income groupsA regressive tax system requires the low-income groups to pay a higher tax than the high-income groupNOTE: Tax systems are described according to its overall effect

Direct and Indirect TaxesDirect Taxes are directly imposed on people or on the incomes of businessesthe burden of the tax cannot be passed on to othersEX: Income, Estate & inheritance, Residence, Real Property

Direct and Indirect TaxesIndirect Taxes are levied on goods, services & transactions the burden of the tax can be passed on to othersEX. VAT, Excise, Import Duties, Fines & Penalties

Fiscal Policy and StabilityHow do taxes affect the level of national income?T = f (Y) more business activity will lead to more collected taxesK = 1 / 1 MPCKT = 1 / 1 MPC + MPT** Marginal Propensity to Tax

Progressive Tax (PT) as an Automatic (Built-in) StabilizerREMEMBER: PT collects taxes from those who have morePT can inhibit or limit the overheating effects of an economy beyond full employmentPT can boost the economy during periods of decline taxes drop more than income does and therefore can boost the economy

Are Taxes and G Flexible?Why must government be flexible with tax collection and with G?Functions of Government (in Fiscal Policy) stabilization : towards a deficit when the economy is under full capacity and unemployment is high towards a surplus when the economy is overheating

Are Taxes and G Flexible?G is rigid as spending for education, health and the like are NOT cyclicalT relatively flexible t s are increased OR new taxes are put in place when private spending is overheating the economy siphons off funds from the private sector t s are decreased OR inefficient taxes are removed OR some taxes are temporarily suspended when the economy is performing below capacity businesses will have more money to spend

The Fiscal DeficitG > Traises demand and output IN THE SHORT RUNGovernment can finance its deficit by: borrowing from abroad borrowing from the BSP borrowing from the domestic money market : open market operations

Fiscal Policy and GrowthG for education is investment in human capitaldebt servicing : lessen the amount of available funds for necessary services and infrastructuremust also be used to improve national productivity ex. improved irrigation, transport systems, telecommunications etc

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