Chapter 11 - Public Finance

8/3/2019 Chapter 11 - Public Finance

1/52

CHAPTER11

Public Finance


2/52

What is Public Finance?

Public finance is the economics of thepublic sector regarding taxation,expenditure and barrowing.

It is the basic role of the governmentto guide, correct, and assist the

operations of the economy in order tominimize the limitations of the marketsystems.


3/52

Example:

Only those who have money can acquiremore goods and services. Precisely, this

is the reason why the poor die of hungeror disease . Since the market orcapitalist economy can not perform all

economic functions, a government

policy is needed to guide, correct, andassist the operations of the economy.


4/52

Fiscal functions

The word fiscal has been derived from the Latinword fiscuswhich means money bag.

It pertains to public treasury or revenues.

The government collect revenues and spend theseto satisfy the various sectors of the economy andsociety such as education, defense, public works,

agriculture, health, and so forth.

Public money is allocated through the nationalbudget system.


5/52

There are three major fiscalfunctions:

Allocation function Distribution function

Stabilization function


6/52

What is Allocation function?

Private goods like rice, soap or cakeare allocated in market.

Those who have money and they arewilling to acquire such goods.However, in the case of most socialgoods it is not efficient to allocatethem through market.


7/52

In the Philippines, there are also goods

and services sold by the government at alower price or even free. But these arelimited due to our inadequate financial

resources. One good example of socialservice is the LRT, those who likeconvenience and prompt travel; PGHalso extends competent and freemedical services to the poor


8/52

What is Distribution function?

The issue of fair distribution ofwealth and income has been a problemfrom ancient times to modern times.

This economic theory appears to begood but in countries where there isno just distributions of the factors ofproduction (land, capital, labor,entrepreneur), only very few haveincomes while the great masses havevery low incomes.


9/52

Social reformers fight for distributivejustice. They claim that the productive

resources of society should be fairlydistributed among its members. If this isdone, the gap between the rich and the

poor is narrowed.


10/52

What is Stabilization function?

One major goal of fiscal policy is theattainment of economic stability.

When there are no problems ofunemployment and inflation, the economy issaid to be stable.

The government through the fiscal tools oftaxation, barrowings, and expenditures canminimize or eliminate the problems ofunemployment and inflation.


11/52

What is fiscal policy?

Fiscal policy refers to the revenue andexpenditure measures of the public budget.

In formulating fiscal policies, the voters,the president and his cabinet (executivebranch), and the legislative body (congressor general assembly) are involved.

The most important needs of the economyand the people are given top priority.


12/52

What are the objectives of fiscalpolicy?

Provision for social goods;

Equitable distribution of wealth and

income; Maintain high employment;

Ensure price stability; and

Sustain a satisfactory rate ofeconomic growth


13/52

The national budget contains specific provisionsfor the funding of projects and programs gearedtowards the attainment of the aforementionedpolicy objectives.

1986 national budget is with a social conscience.This means that the budget is focused towards thepromotion of the welfare of the poor masses


14/52

Shortcomings of fiscal policies

Many government programs and projects are verygood.

They are always intended for the good people,especially the poor masses. However , when itcomes to results, it is already different.

Such projects are not properly managed orimplemented. For example, the land reform programin most less developed countries is failure.


15/52

Many people do not understand why thegovernment should increase taxes and reduce

government expenditures at a time when theeconomy is prosperous.

They do not know such fiscal measures are

designed to prevent inflation. So, for politicalexpediency the government does not adopt suchfiscal policies.

Fiscal policies also suffers from several lags, justlike monetary policies. A lag is a delay in solving agiven problem.


16/52

Fiscal Policy and the Masses


17/52

Through its instruments such as

taxation and governmentexpenditures can be effective forcein improving the social economic

conditions of the poor.

Since most of the people are poor in

less developed country, the emphasisof a fiscal policy should be shiftedtowards the poor.


18/52

A fiscal policy has both positive andnegative fiscal effects on theindividuals and the economy. Taxation

can encourage or discourage investment,employment, production and savings.


19/52

The Politics of Public Finance

In democracy the preference for socialgoods by the people are expressedthrough their elected representatives.

Likewise, there are very powerfulspecial groups with vested interests

who also work for the approval ordisapproval of certain proposedprojects.


20/52

Public Expenditures

The expenditures of the governmentare reflected in the national budgetwhich shows the specific programs and

projects of the government.

Public expenditures mirror the majorgoals of the government.


21/52

The national government expendituresare allocated among the various sectors

such as economic services, socialservices, defense and general publicadministration and debt service.


22/52


23/52


24/52

o over and above everything else, social

justice should be the first priority inestimating the benefits of governmentexpenditures.

o a government should provide morefunds to programs and projects w/c areprincipally designed to improve the social

& economic conditions of the poormasses.


25/52

TAXATION

o is the means of raising funds for theoperations of the government, especiallyits public services.

o taxes are very important

o

they constitute the lifeblood of oureconomy and society


26/52

o they also alleged that there is graftand corruption in the administration of

the tax program.


27/52

WHAT IS A GOOD TAX SYSTEM?

o The canons (criteria) of a good taxsystem according to Adam Smith are:

o Equityo Certaintyo

Convenienceo Economy


28/52

REQUIREMENTS OF A GOOD SYSTEM:

o The distribution of the tax burdenshould be equitable or fairo Taxes should not ruin an efficient

market systemo Taxes should serve as tools infacilitating economic stability andeconomic growtho Tax administration should be efficiento The cost of tax administration & the itscompliance should be economical.


29/52

APPROACHES TO EQUITABLETAXATION

o Taxpayers as good citizens have theresponsibility to contribute a fair share

to the cost of government.

o both such burden can be made less

painful or reasonable by the governmentthrough the concepts benefit received &ability-to-pay.


30/52

BENEFIT RECEIVED

People pay their taxes in accordancew/ the benefits they received fromgovernment projects.

those who do not receive benefits donot pay taxes.

EX: postal services, use of roads &bridges w/ toll fees, entrance of a publicrecreation park w/ fee & so forth.


31/52

ABILITY-TO-PAY

people should pay their taxes (as

contributions to the cost of government) onthe basis of their ability to pay.

those who have more incomes or wealth pay

more taxes than those w/ less incomes orwealth.

more widely used as the basis in computing

our tax payments. it is more accurate to measure income &wealth than benefits received.


32/52

TAX STRUCTURE

1.Progressive Tax the one whose rate increases as

income increases. a taxable income of less P10,000

pays 3 percent while those taxable

income between P10,000 & P15,000pay 5 percent


33/52

2.Registered Tax when its rate decrease as income

increases the main portion of our tax

revenues comes from the indirecttaxes.

3.Proportion Tax is one whose rate remains constant

regardless of the size of theincome


34/52

DIRECT TAXES

Income Taxeso corporationso individualso fine and

penalties Residence Tax Immigration Tax

Real Property Tax Estate, gift andInheritance Tax

INDIRECT TAXES

Amusement Taxes Customs Duties Privilege Taxes Sales Taxes

Stabilization Taxes


35/52

EXEMPTIONS FROM TAXATION

o encourage & promote their growth, suchas cooperatives, cottage industries, infantindustries, and rural banks, among others.

o organizations or institutions w/c areengaged in non-profit undertakings,

together w/ some specific financialbenefits or incomes, are exempted by theTax Code and special laws.


36/52

Examples:

Corporations or associations organizedand operated solely for religious,charitable, scientific, athletic, or

cultural purposes. Benefits received by members fromGSIS.

Social security benefits, retirementgratuities, pensions, & other similarbenefits received by retired employees


37/52

Prized received by winners from the

Philippine Charity Sweeptakes Office.

Benefits received from the U.S.

government through the U.S. VeteransAdministration

Donations to social welfare, cultural &charitable institution


38/52


39/52

Many claim our tax system is notprogressive because the real burden of

taxation falls on the poor. The poor are more honest in paying

their direct taxes, such as their

individual taxes. They have noconnections or special tax consultant tohelp them avoid the payment of taxes.

Another criticism is the unrealistic taxexemptions given to individual incometax payers.


40/52

likewise, beyond a certain point in the

income bracket, individuals are discouragedto work because their income go mostly totaxes.

they prefer to retire in their jobs orrefuse to accept higher positions. Eitherway, their net income is higher.

The big shots do not pay the right

amount of taxes because of theirconnections.


41/52

Furthermore, our tax collection is veryinefficient. They say that if all taxes are

really collected , there are enough tofinance the expenditures of thegovernment. Hence there is no more

need to increase the rates of taxes andno tax on the other productive activities.This is the observation of not a feweconomists. They noted that taxadministration in most less developedcountries is not only inefficient but alsocorrupt.


42/52


43/52

The debt of the poor countries is about1.3 trillion.

Such huge debts reflect the very badeconomic conditions of the poor countries.In fact, many of them could not pay their

debts to the World Bank. Our country has also accumulated a big

amount of foreign loans. In fact based on

1988 record, it was no.8 among the biggestborrowers of the world. Of course, criticsof the previous government believe thatour economic recovery is just a farce.


44/52

The IMF has postponed rescue loans tomany Latin countries for ignoring economicreforms set by the IMF like sharpcurrency devaluation, government spending

cuts, and credit and import control. SuchIMF-prescribe reforms have beenintended to solve the extremely high

inflation rate pervading in the region.


45/52

Th bi t d bt f d i L ti


46/52

The biggest debtors are found in LatinAmerica. These are Brazil, Mexico. Argentinaand Venezuela. Despite the gigantic foreign

loans that they received, still there has been novisible economic progress. Instead, theireconomies plummeted into the deepest level.

Thus, people asked: Where did the money go?Some economic observer gave the ff. answers:

1. Costly construction of projects;

2. Rising cost of imported oil and interestpayments; and

3. Most of it were stolen or lost, and perhaps one-third went into private banks in NEW YORK,

LONDON, ZURICH and MIAMI.


47/52

Our government economic managers

claimed that our foreign debt went upbecause of:

1. The increase in the prices of oil;

2. Increase in the interest rates of foreignloans; and

3. The decrease of our foreign exchange

earnings due to economic recessionamong the industrial countries w/cbought our products.


48/52

Highly indebted developing countries:

*Argentina *Bolivia*Brazil *Chile*Columbia *Costa Rica

*Cote dIvoire *Ecuador*Jamaica *Mexico*Morocco *Nigeria

*Peru *Philippines*Uruguay *Venezuela*Yugoslavia


49/52

Most Creditworthy Countries

Based on March 1988 survey of 112countries conducted by 100 internationalbanks, Japan has maintained its creditrating as the most creditworthy country --- with the score of 94.6. The United

States used to be no. 1. It moved down tono. 4 for the last several years.

The Philippines moved up from no. 73

in 1987 to no. 71 in 1988. In 1979, ourcountry was no. 3 among the lowest inAsia-pacific region. North Korea hasremained the lowest in the credit ratingladder, with the score of 4.0.

The top 25 countries in credit rating


50/52

The top 25 countries in credit ratingwere:

1. Japan2. Switzerland3. West Germany4. United States5. Netherlands6. United Kingdom7. Canada8. France9. Australia

10. Sweden11. Norway12. Finland13. Italy

14. Belgium15. Taiwan16. Singapore17. Spain18. Denmark19. Australia20. Hong Kong21. Soviet Union22. New Zealand

23. China24. South Korea25. Ireland


51/52

Strings Attached to Foreign Loans

For many years, the industrial countrieshave been extending billions and billions ofdollars as foreign loans to the poorcountries. How come they have evenbecome poorer? Evidently, such enormous

financial assistance have no positiveeffects on the economies of the poorcountries. Nonetheless, it can be said thatthe poor countries do not know how to usetheir foreign loans properly. But above all,

the conditions attached to foreign loansfavor more the foreign creditors than thepoor debtors. As a result, more economicbenefits go to the lenders.

F f P


52/52

Foreign Loans for ProgressCredit is good as long as it is used for

development purposes. Even the UnitedStatesrelied heavily on European financial Capital

duringits formative years, In later years, however,

itdeveloped its own capital Formation. Eventhe

foremost Filipino nationalist, Claro M. Recto,was

in favor of foreign loans. He said that whenweborrow money from abroad for our economicdevelopment, we become the capitalists, Andtherefore retain the Profits.

Chapter 11 - Public Finance

Documents

Transcript of Chapter 11 - Public Finance