Chap. 11. fiscal policy


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Chap. 11. fiscal policy

  1. 1. Reported by : Gutierrez, IreneAlvarez, Celica MayCortez, Cherry Ann Sala, Sheila
  2. 2. Fiscal Policy It takes off to influence income and consumptionand lead the economy towards growth and development. It also has non-economic objectives which mayconflict with economic aims. It is the use of government revenue collection(taxation) and expenditure (spending) to influence theeconomy.
  3. 3. Sources and Uses of Public Fundsa.Taxes Include income taxes of individuals and businesses, property taxes, residence taxes, import taxes, inheritance taxes, gift taxes and other specific taxes. Two Collecting agencies: - Bureau of Internal Revenue - Bureau of Customsb. Non-tax revenues Include collection of fines and fees, licenses and registration charges and profits earned by government- operated and controlled corporations.
  4. 4. Public Debt consists of all claims against our governmentwhich may have resulted from loans or advances extended tothe Philippine government or as payment of goods or servicesrendered to it.A government tends to borrow for three reasons:1.Due to political reluctance to raise tax2.Some government-sponsored capital improvements shouldbe paid3.A deliberate use of the budget to stimulate the economy.Government borrowing may be undertaken from internalsources such as Central Bank, or from external sources suchas foreign governments.
  5. 5. Taxation: A Tool Taxation as a tool is not just a source of income of thegovernment. It is also used as an instrument to manipulateconditions in the economy. An increase in tax rates will lessen the disposable incomeof the people and cause their demand to decrease.
  6. 6. Principles of TaxationDirect Taxes are collected from people and are paid directly to atax collecting agency of the government. Examples: Income taxes, inheritance and residence taxesIndirect Taxes are collected against goods and services and onlyindirectly on people. Examples: Sales taxes and import duties
  7. 7. Taxation is the system of payments that individuals andbusinesses are required to pay the government.Progressive tax system The tax rate tends to increase with an increase in the tax baseRegressive tax system It is one where tax rates are high for low bases anddecrease with high bases.Proportional tax system It imposes a uniform tax rate on all income levels.
  8. 8. Burden of TaxationTaxes are considered a burden.Two types of tax burden: A. Impact It is the burden of the person who pays the tax for the first time B. Incidence It is the burden of the person who ultimately has to pay for the tax.For indirect taxes, the impact and the incidence of the tax fall ondifferent people.
  9. 9. Income Distribution and the Lorenz CurveIncome distribution refers to the pattern of incomes received bydifferent sectors in the economy.The size of income distribution shows how income is shared.
  10. 10. The Uses of Fiscal PolicyFiscal Policy may be used by the government to stimulate anddepress the economy.Fiscal policy can either be expansionary or contractionary.It is expansionary or loose when taxation is reduced or publicspending is increased with the aim of stimulating total spending inthe economy, known as aggregate demand.On the other hand, fiscal policy is contractionary or tight whentaxation is increased or public spending is reduced in order torestrict demand and slow down the economy.
  11. 11. Increasing government purchases or cutting tax rates will have theeffect of increasing aggregate demand. Reducing governmentpurchases or increasing tax rates will decrease aggregate demand.A deficit budget has an expansionary effect since it increases theflow of money into the economy as a result of an increase ingovernment spending, the excess spending being derived from thesources other than taxes. A surplus budget has an contracting effect since not all the taxescollected from the people are channelled back into the economicstream.
  12. 12. Effects of the BudgetThe deficit and balanced budget have an expansionary effect whilesurplus budget can depress the economy.Consider a budget where tax collections amount to P450 billionand the government spends P480 billion. This is obviously adeficit budget since government expenditure exceed tax revenueby P30 billion.Supposing, the MPC is 80%, then the income multiplier will be: K = 1 / 1 - .8 = 1 / 2 = 5 P30 billion x 5 = P150 billion, which means additional incomegenerated and can therefore lead to expansion in the economy.
  13. 13. Now, consider a budget where tax collections amount to P450billion and the government spends P430 billion out of thesecollections. The government keeps a surplus of P20 billion.Using the same MPC of 80% so income multiplier is 5, the P20billion surplus will lead to decrease in income multiplied by 5.Thus, P20 billion x 5 = P100 billion decrease in income.It has been said that the balanced budget is also expansionary, butto a lesser extent than the deficit budget. This is because thebalanced budget increases income only by an income multiplierequal to 1.
  14. 14. Supposing the P450 billion tax collections of the government are all spent.Since government expenditure is equal to tax revenue, then the balancedbudget will increase income by 1. Thus, P450 billion x 1 = P450 billion increasein income.Comparing, what the government actually earns from its spending with what isgiven up the tax payers, we derive the following:Government Exp. Of P450 billion xIncome multiplier of 5 P2,250 billionIncome given up on tax payments:Consumption spending: 80% of P450 billion= 360 billion x multiplier of 5 1,800 billionSavings: 20% of P450 billion = P90 billion:no income generated ── ──────────NET INCREASE IN INCOME P450 billion