Announcements:

We will have group presentation next meeting regarding todays lessons:

Benefit Principle Ability-to-Pay Principle Progressive Tax Proportional Tax Regressive Tax

CE Public Finance

Public Finance
What is public finance?

Public finance means how the government raises funds and spends the money on various kinds of services for the economy.
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So public finance is concerned with

The revenue and expenditure of the government

The government is referred to as

the public sector

CE Public Finance

Everyone has a budget

Balanced Budget:

Revenues (from tax collection) = Govt Spending Revenues > Spending Revenues < Spending Budget Surplus Budget Deficit

Revenues mainly from Taxes. Some comes from Tariffs, fees, and other levies on goods and services

Difference between Deficits and Debt

Deficit - when a budget is created and spending is greater than revenues.

Debt - the accumulated borrowing to cover deficits.

Taxation
The system of compulsory contributions levied by a government or other qualified body on people, corporations and property in order to fund public expenditures. An inherent power of the state to raise income and to demand enforced contributions for public purposes.

Purposes of Taxation
taxes also impact the economy in the following ways:
Create revenues for the government Affect consumption and production Behavior adjustment Productivity and Growth Correct negative externalities Stabilize Prices

Taxes Fund Public Goods and Services

Health Care for Elderly

National Defense
Social Services

State and Local Police Financial Aid

Public Education

Characteristics of a sound Tax system

Fairness Clarity and Certainty Convenience Efficiency

TWO PRINCIPLES of TAXATION

Who pays What is based on two principles:
Benefit Principle - The more you benefit from something, the more you should pay. Taxes on gasoline Ability to Pay - The more you make the more you should pay.

Classification of taxes
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Classification of taxes
According to the party who bears the tax burden, taxes can be classified into: ________ direct taxes and ________ indirect taxes

According to how the tax payment changes with income, taxes can be classified into: __________ proportional and progressive , ____________ regressive taxes __________
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Direct tax
is a tax on income or wealth. The owner of the income or product pays the tax the tax incidence or burden CANNOT be shifted. the tax rate is either progressive or proportional Examples: Income tax profit tax property tax interest tax ?

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Income Tax
Individual income taxes are paid in a year through a payroll withholding system By April 15, of every year you must file a tax return.

Indirect Tax
Tax on goods and services Tax burden can be shifted to other people

Indirect Tax

Producers Consumers

Indirect tax
is a tax on goods and services the tax incidence or burden CAN be shifted ( usually to the consumers, depending on the elasticity of demand and supply ) the tax rate is regressive cigarettes tax; stamp duty; general rates; vehicle import tax; airport departure tax; tax on alcoholic liquor; hotel accommodation tax; entertainment tax; betting tax and etc.

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Examples of Indirect Tax

Betting Duty Motor Vehicles First Registration Tax

Entertainment Tax

Stamp Duties

Tax on Alcoholic Liquor

Progressive, proportional and regressive taxes

rogressive tax: As income rises, the tax payment takes an increasing percentage of taxable income. ____________________ roportional tax: As income rises, the tax payment takes the same percentage of taxable income. ____________________

egressive tax: As income rises, the tax payment takes a decreasing percentage of taxable income. ____________________
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Progressive Tax
People with higher incomes pay a higher percentage in taxes. Simple the more you make the more they take

INCOME

$10,000 $50,000

Amount Paid Amount Paid in Taxes as a percentage of Income $1,000 10% $ 10,000 20%

$100,000

$ 30,000

30%

Progressive Tax
40%

Average tax rate ________ as increases income increases

20% Tax Rate 10%

10,000 50,000 Income 100,000

Example (I) of Progressive Tax

( I ) Salaries / Income Tax

Tax rate progresses from 2% to 17% while the standard tax rate is 15%.

Salaries Tax

Example (II) of Progressive Tax

( II ) Estate Duty Tax rate from 6% to 18% on the wealth of a deceased person passes to his inheritor valued above $5 million. Estate Duty

Proportional Tax
Average Tax Rate

40%
20% 10%

Average tax rate same __ remains the ______ at all levels of income
Proportional Tax Income

10,000 50,000 100,000

Example (I) of Proportional Tax

Profits tax rate of unincorporated business = 15.0% Profits tax rate of corporations = 15%

Profits Tax

Example (II) of Proportional Tax

Property Tax = 15%

Illustration of Proportional Tax e.g. Profits Tax

Investor Net Profits (i.e. income) Stephen $100,000 David $500,000 Profits Tax Payable Average Tax Rate

$15,000
$75,000

15%
15%

Profits Tax Rate = Net Profits X Average Tax Rate

Conclusion of Proportional Tax e.g. Profits Tax

Conclusion

As net profit (income) is increased, the same percentage of taxpayer pays the _______ income as tax, i.e. the average tax rate constant as income is increased. remains __________

Regressive Tax
Average Tax Rate

Average tax rate falls as income ______ increases. Regressive Tax

Income

Regressive Taxes
The lower the income the higher percentage paid in taxes. Example: Sales tax. Assume two families paid $1000 in sales tax by the end of the year. Which family spent a higher percent of their income on taxes? Income Amount paid Amount paid in taxes as a in taxes
percentage of their income.

$10,000 $50,000

$1000.00 $1000.00

10% 5%

Examples of Regressive Tax

All types of sales tax (indirect taxes) are regressive taxes which are taxed on goods and services.

Tax Evasion
When there is fraud through pretension and the use of other illegal devices to lessen ones taxes, there is tax evasion
Under-declaration of income Non-declaration of income and other items subject to tax Under-appraisal of goods subject to tariff Over-declaration of deductions