HKCE Macroeconomics
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Transcript of HKCE Macroeconomics
CH6-Public Finance By Mr. LAU san-fat1
HKCE Macroeconomics
Chapter 6: Public Finance
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Major Ideas
sources of government revenue principles of taxation types of taxation effects of taxation sources and socio-economic implications of
public expenditure kinds of budget and its effects major proposals in the current budget speech
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Meaning of Public Finance
Various ways of raising and spending money by the government for achieving certain goals of an economy, e.g. income distribution & stimulating production.
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Sources of Government Revenue
Tax revenue Direct tax vs. indirect tax Progressive, proportional and regressive
taxes Non-tax revenue In HK, direct tax is the major source of
government revenue
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Non-tax Revenue
1. Fines, forfeitures and penalties2. Revenue from properties3. Provisions of public services(utilities)4. Fees and charges5. Land transactions, sales and interest6. Fund revenue
from loan repayments, interest of some government funds
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Four Principles of Taxation
1. Equity Everyone should pay taxes in proportion to
his income2. Certainty
A taxpayer should know well what his taxes are, when and how to pay
3. Economy The administration cost of tax collection
should be small in proportion to its yield
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Four Principles of Taxation
4. Convenience The way of collecting tax payments should b
e convenient to both taxpayers and the government
Tax in HK could be settled by electronic payment, or paid by phone, by bank ATM, by post, via the internet or in person.
Exercise 1: Textbook/P.146-7/MCQs 1&2
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Classification of Taxes
Direct taxes Tax burden cannot be shifted to a third party A tax on income/revenue Including salaries (or income) tax, property
tax, profits tax and estate duty
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Salaries Tax in HK
Income arising in or derived from Hong Kong is subject to salaries tax
After deducting personal allowances and other allowances,and deductions, the remainder of one's annual income, which is known as taxable income, will be taxed.
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Salaries Tax Assessment (04/05)
Net Chargeable Income*
Rate** Tax
On the 1st 30,000 2% 600
On the next 30,000 8% 2,400On the next 30,000 14% 4,200Remainder 20%
*NCI =Total Income – Deductions – Allowances **Tax rate = tax payment/taxable income
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Salaries Tax Assessment (04/05)
Standard Rate of Tax(SR) Tax charged shall not exceed the standard
rate of tax applied to the net total income without allowances, i.e. total assessable income less total deductions only.
Standard rate =16% for 2004/05. Tax payment = (gross) income x SR
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Direct Taxes in Hong Kong Property tax
In accordance with the standard tax rate on the actual rent received Allowance of 20% for repair & maintenance
Profits tax 16% on profits of unincorporated business 17.5% on profits of incorporated business (limited companies)
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Indirect Taxes in Hong Kong
Indirect tax: Tax burden can be shifted to a third party A tax on goods and services Sales tax, duties, rates, stamp duties, betting
duty, hotel accommodation tax, first registration tax, and royalties.
Exercise 2: Textbook/P.148/Q7.1
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Indirect Taxes in Hong Kong
Duties Hydrocarbon oil, alcoholic beverages, methyl
and ethyl alcohol, tobacco Rates
5% of the rateable value (i.e. expected annual rent)
Stamp duties On assignments of leases, sales of immovabl
e property & shares contracts
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Indirect Taxes in Hong Kong
Betting duty On bets & the proceeds of Mark Six lotteries
Hotel accommodation tax 3% of hotel accommodation expenditure
First registration tax On newly imported cars
Royalties On business units for exclusive rights
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Progressive Taxes
Taxes that take an increasing proportion or percentage of one's (taxable) income as one's (taxable) income increases.
The higher the (taxable) income, the higher the tax rate, vice versa; ceteris paribus.
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Progressive Taxes: An Example
Income Tax payment Tax rate = (tax/income)x100%
$10 000 $1 000 $(1 000/10 000) = 10%
$20 000 $3 000 $(3 000/20 000) = 15%
$30 000 $6 000 $(6 000/30 000) = 20%
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Proportional Taxes
Taxes that take the same proportion or percentage of one's (taxable) income as one's (taxable) income increases.
The tax rate remains unchanged, regardless of one's (taxable) income, ceteris paribus.
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Proportional Taxes: An Example
Income Tax payment Tax rate = (tax/income)x100%
$10 000 $1 000 $(1 000/10 000) = 10%
$20 000 $2 000 $(2 000/20 000) = 10%
$30 000 $3 000 $(3 000/30 000) = 10%
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Regressive Taxes
Taxes that take a decreasing proportion or percentage of one's (taxable) income as one's (taxable) income increases.
The higher the level of one's (taxable) income, the lower the tax rate, vice versa; ceteris paribus.
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Regressive Taxes: An Example
Income Tax payment Tax rate = (tax/income)x100%
$10 000 $1 000 $(1 000/10 000) = 10%
$20 000 $1 500 $(1 500/20 000) = 7.5%
$30 000 $1 800 $(1 800/30 000) = 6%
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Classification of Taxes-Diagrams
Progressive Proportional Regressive
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Classification of Taxes-Diagrams
Progressive Proportional Regressive
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Classification of Taxes-Diagrams
Progressive Proportional Regressive
Exercise 3: Textbook/P.150-1/MCQ 4 & Q7.2 & Q7.3
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Is Salaries Tax Progressive?
Exercise 4: Textbook/P.152/MCQ 5 & Q7.5
TB/P.152Closer Look
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Taxes in HK – A SummaryProgressive Taxes
Proportional Taxes
Regressive Taxes
DirectTaxes
Salaries tax below the standard tax rateEstate duty
Salaries tax at the standard tax rateProfits taxProperty tax
IndirectTaxes
DutiesSales taxesRatesStamp dutiesBetting dutyroyalties
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Effects of Taxation
On general price level Direct taxes (salaries tax) reduce one's dispo
sable income and hence lower aggregate demand for products, resulting in a lower general price level
Indirect taxes (sales tax) raise production cost and thus increasing the general price level. Inflation may exist.
Exercise 5: Textbook/P.154/News online 7.2
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Effects of Taxation
On general price level Direct taxes (salaries tax) reduce one's dispo
sable income and hence lower aggregate demand for products, resulting in a lower general price level
Indirect taxes (sales tax) raise production cost and thus increasing the general price level. Inflation may exist.
Exercise 5: Textbook/P.154/News online 7.2
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Effects of Taxation
On standard of living Direct taxes (salaries tax) reduce one's dispo
sable income, resulting in a lower standard of living.
Indirect taxes (sales tax) may cause inflation but allows higher nominal wage. The living standard will be lower if the increase in nominal wage rate is less than the inflation rate.
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Effects of Taxation
On investment Direct taxes (profits tax) reduce one's net pro
fits and investment incentive, resulting in less investment.
Indirect taxes (stamp duty) may reduce investment incentives in the real estate market.
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Effects of Taxation
On working incentive Direct taxes (salaries tax) reduce one's worki
ng incentives, especially if salaries tax is progressive.
Indirect taxes (stamp duty) will not affect working incentive as it is not a tax on income.
Exercise 6: Textbook/P.155/Q7.7
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Effects of Taxation
On income distribution Progressive taxes reduce inequality of an ec
onomy as the rich have to pay a larger proportion of their income as tax than the poor.
Regressive taxes will widen the income gap as the poor have to pay a larger proportion of their income as tax than the higher income group.
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Effects of Taxation
On resources allocation Regressive taxes (sales tax) raise productio
n cost and reduce supply, thus re-directing the flow of resources away from that production.
Exercise 7: Textbook/P.156/MCQs 7 & 8 Exercise 8: Textbook/P.156/Q7.8
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Effects of Taxation
On undesirable issues Taxes may be used to check against undesira
ble social issues. Example: duties on tobacco raise cigarette pri
ces and thus lowering its consumption.
Exercise 9: Textbook/P.157/Q7.9 Textbook/P.158/Close Look 7.3
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Effects of Taxation
On economic growth and employment Salaries tax lowers people's disposable
income and profits tax reduces investor's net profits, resulting in a slower economic growth and higher unemployment rate.
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Effects of Taxation
On capital flow The higher the profits tax rate, the more the
capital outflow will be as investors' net profits get smaller, vice versa.
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Effects of Taxation
On government revenue Higher tax rates will bring in more tax revenue
in the short run. However, lower disposable income and net pr
ofits reduce future economic activities, resulting in less tax revenue in the future.
Exercise 10: Textbook/P.159/Q7.10 Closer Look7.4: Textbook/P.159
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Public Expenditure by Nature
Capital expenditure Expenses on capital works Example: expenditure on infrastructures
Recurrent expenditure Expenses with a regular nature Example: wages to civil servants
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Public Expenditure by Policy Area Group
Major items: Education Housing Social welfare Health
Others: Economics, security, environmental & food,
infrastructure and support.
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Effects of Public Expenditure
On Economic Growth Increasing public expenditure on
infrastructure, investment on technology and innovation, and education and training will enhance economic growth; vice versa.
On Employment Increasing public expenditure on public
projects creates job and investment opportunities; vice versa.
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Effects of Public Expenditure
On Living Standard Increasing public expenditure on public utilities,
social welfare and community services enhance people’s living standard; vice versa.
On Income Distribution With progressive and proportional taxes,
increasing public expenditure on social and welfare services may result in a more even income distribution; vice versa.
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Effects of Public Expenditure
On Resources Allocation Resources will be directed to a certain
production if the government increases its public expenditure on that area; vice versa.
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Methods to Finance Public Expenditure
Using past fiscal reserves lesser reserves for future uses and
emergency purposes Printing money
inflation may result if there is too much money chasing too little goods
Increasing charges and fees cost of living will increase
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Methods to Finance Public Expenditure
Borrowing interest will be a significant burden to the
government or society Increasing tax
increasing salaries tax will reduce people’s purchasing power and their working incentives
increasing indirect tax will raise the general price level
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Public Sector
Public sector(PS) refers to public expenditure(PE) as a proportion of GDP
PS = (PE/GDP)x100% The public sector of HK is small but on an
increasing trend (from 17.8% in 1995-96 to 21.6% in 2001-02)
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Public Sector
Reasons for increasing size of public sector: growing population increasing effort to boost the economy after the
economic turmoil in the late 90s increasing expenditure on shaping HK as an
international city by expanding its infrastructure
Exercise 11: Textbook/P.164/MCQ 9
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The Government Budget
A budget is a financial statement giving an estimate of the expected revenue and expenditure of the government for the coming fiscal year.
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Types of Budget
Deficit budget: the estimated expenditure is greater than the
estimated revenue Surplus budget:
the estimated revenue is greater than the estimated expenditure
Balanced budget: the estimated expenditure and the estimated
revenue are equal
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Remarks on Budget
Exercise 12: TB/P.166-7/MCQ 10 & Q7.11
A surplus or deficit budget is only an estimation of the expected government revenue and expenditure.
A budgetary surplus is a review of a year’s actual financial situation of the total public expenditure and revenue.
Closer Look 7.6/TB/P.168