Ec102 may 11

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Ec102 may 11

  1. 1. TAX INCIDENCE<br />May 11, 2011<br />
  2. 2. QUIZ – True or False<br />1. Personal Income Tax is a nondistortionary tax.<br />2. Landing fees at airports is an example of an indirect tax.<br />3. The Phil. Tax system is net regressive.<br />
  3. 3. QUIZ – True or False<br />4. The regressive nature of the Value Added Tax shows Vertical Equity.<br />5. Estate tax is imposed on the right of an individual to transfer property during the lifetime of the transferer levied on the donor.<br />BONUS: The “Father” (or principal author) of the E-Vat Law of 2005<br />
  4. 4. FORMS OF TAXATION<br />Direct Taxes - Progressive<br />Personal Income Tax<br />Corporate Income Tax<br />Transfer Tax- gift tax estate tax<br />Indirect Taxes - Regressive<br />Sales tax<br />Specific tax – import/export tax<br />
  5. 5. DISTRIBUTION OF TAX<br />Direct Taxes – more progressive<br />Indirect Taxes – more regressive<br />Philippines – in general progressive<br />Argued that more net regressive<br />
  6. 6. DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM<br />Economic Efficiency<br />Administrative simplicity<br />Flexibility<br />Political responsibility<br />Fairness<br />
  7. 7. ECONOMIC EFFICIENCY<br />Behavioral<br />Financial<br />Organizational<br />Announcement Effect<br />
  8. 8. ECONOMIC EFFICIENCY<br />Nondistortionary Taxes<br />Lumpsum Tax<br />Head Tax<br />Corrective Taxation – correct market failure<br />Ex: Pigouvian Tax<br />
  9. 9. FAIRNESS<br />Horizontal Equity<br />SAME OPPORTUNITY SET<br />Vertical Equity<br />More ability to pay, tax them more<br />
  10. 10. GOVERNMENT REVENUE<br />Tax Revenue (80-90%)<br />Direct tax (50%)<br />Indirect Taxes <br />Non-tax revenue<br />Asset sales<br />Stocks<br />Service fees <br />
  11. 11. OTHER WAYS TO RAISE MONEY<br />BOT – Build Operate Transfer<br />Borrowing from Private Banks<br />Municipal Bonds<br />
  12. 12. FRAMEWORKS <br />Utilitarianism – MU of income – loss in utility of taking P1 from someone – should be same for all individuals<br />If MU1 > MU2, reduce income of 1 and increase income of 2 by same amount<br />Basis for progressive taxation<br />Raising tax on higher income may reduce work effort<br />Rawlsian – increase tax rate on everyone except worst off, until revenue maximized<br />
  13. 13. VALUE-ADDED TAX (VAT)<br />A tax on sale of goods and services, domestically produced or imported, at each stage of the production and distribution process<br />Form of sales tax<br />Burden is borne by final consumers of VAT-able g/s<br />
  14. 14. VALUE-ADDED TAX (VAT)<br />Destination principle: taxed on basis of where it is consumed, instead of where it is produced<br />Self-policing feature: all firms required to show evidence of tax paying<br />
  15. 15. EXPANDED VAT (2005)<br />Why: addt’l revenue, cut budget deficits<br />New VAT Rate<br />Shift in nature of VAT<br />VAT coverage<br />Non-VAT provisions<br />
  16. 16. EVAT – New Tax Rate<br />10% retained but President has authority to raise it to 12% by Jan. 1, 2006 if either one of these exists:<br />VAT collections in 2005 exceed 2.8 percent of gross domestic product (GDP)<br />National Government deficit for 2005 exceeds 1.5 percent of GDP<br />
  17. 17. EVAT – Shift in nature of VAT<br />Firms are no longer allowed to immediately claim full credit for the VAT they paid on capital goods. <br />Required to spread out their claim for VAT credit on capital good purchases over five years<br />
  18. 18. EVAT – Shift in nature of VAT<br />Places a cap on the amount of VAT credit that firms may claim for their input purchases<br />
  19. 19. EVAT – VAT Coverage<br />Some exemptions from VAT were lifted<br />Ex: coal and petroleum products<br />Services rendered by doctors of medicine and by lawyers<br />Sale of works of art, literary works, musical composition and similar creation<br />VAT base effectively broadened<br />
  20. 20. EVAT – Earmarked Funds<br />Before, all funds straight to Treasury<br />Half of the LGU’s share in the incremental VAT collection is for social and economic services<br />15% - public school buildings and furniture and in-service of public school teachers in the elementary and secondary levels; 10% - health insurance premiums of indigents; 15% - environmental conservation;10% to the construction of farm-to-market roads and irrigation facilities<br />
  21. 21. EVAT – Earmarked Funds<br />15% - public school buildings and furniture and in-service of public school teachers in the elementary and secondary levels; <br />10% - health insurance premiums of indigents; <br />15% - environmental conservation;<br />10% to the construction of farm-to-market roads and irrigation facilities<br />
  22. 22. EVAT – Non-VAT Provisions<br />raising of the corporate income tax rate from 32 to 35% to 2009<br />increase of gross receipts tax from 5 to 7 % on royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income of banks and nonbank financial intermediaries<br />
  23. 23. EXPANDED VAT (2005)<br />Output-reducing effect from increasing VAT 1012%<br />Additional burden on firms from input VAT credits for capital equipment distributed over<br />
  24. 24. SIN TAXES<br />Levied on certain socially undesirable goods and services to discourage the public’s consumption. E.g. alcohol, tobacco<br />Converted from ad valorem to specific taxes<br />
  25. 25. SIN TAXES<br />Ad Valorem – percentage of<br />Adjusts to inflation, keeps real value<br />Misdeclaration of value of product<br />Ex: 30% of cigarette sales<br />If sales = P100,000<br />Sin Tax = P30,000<br />
  26. 26. SIN TAXES<br />Specific Taxes<br />Fixed amount per unit<br />Prevents misdeclaration<br />Fails to adjust to inflation<br />Sol’n: indexation<br />Ex: If P5 per cigarette stick and 300 sticks sold, tax = P1500<br />
  27. 27. TAX ISSUES<br />Tax performance - degree at which tax base has been exploited to mobilize gov’t resources<br />Indices of Tax performance<br />Tax ratio – taxes/GNP<br />Tax effort index (taxable capacity)– actual/predicted ratios<br />
  28. 28. TAX ISSUES<br />Tax burden – true economic weight of a tax<br />Diff bet real income before and after tax<br />Tax incidence – whose real income is lowered<br />Who actually pays<br />Equivalent taxes – same effect<br />
  29. 29. TAX ISSUES<br />Tax incidence in competitive markets<br />No diff if tax is imposed on consumer or on producer<br />Does not matter if ad valorem or specific <br />Ad valorem tax – percentage of price<br />Shifting down the demand curve <br />
  30. 30. EQUIVALENT TAXES<br />Income tax and VAT (w/o exempt’n)<br />For every prod’n, corresponding income<br />Uniform sales tax<br />Consumption taxes and VAT (w/ ex)<br />On consumer goods<br />Consumption and wage taxes<br />Lifetime income and consumption<br />Eq in the LR<br />
  31. 31. Factors in Tax Incidence<br />Time span: More elastic in LR<br />Open vs Closed eco: SC of factors more elastic in open<br />Mix of policy changes<br />
  32. 32. IMPROVING TAX COMPLIANCE<br />Tax Evasion – illegal means to avoid paying taxes<br />Underdeclaration of sales<br />Overdeclaration of claims for input VAT<br />Misdeclaration of income<br />Tax Avoidance – legal means to avoid paying taxes<br />
  33. 33. TAX BURDEN<br />Borne by consumers<br />Tax decreases consumption<br />Income effect: Less money<br />Substitution eff: increase in relative price<br />Size of subs eff: shape of IC<br />Borne by producers<br />Producer surplus = between SC and P<br />Rev – TVC<br />
  34. 34. SCHEDULE<br />May 13-18 – remaining topics<br />Thursday, May 19 – Video Presentation<br />Friday, May 20 – Review Session OR finals<br />Monday, May 23 – finals <br />
  35. 35. FINALS<br />Thesis statements?<br />Comprehensive<br />Intuitive before math and graphing<br />Provide examples<br />10 minutes per person<br />Sign-ups today by random number<br />8-12nn, 1pm-4pm<br />
  36. 36. TIPS FOR FINALS<br />DO NOT CRAM. Study each lesson and their relationships.<br />Go there at least 15 minutes before your sched. The dept couch can only accommodate up to 3 persons.<br />Maximize your cheat cards. <br />To be submitted on Thurs – May 19<br />
  37. 37. TIPS FOR FINALS<br />Use your own words.<br />Don’t invent complicated examples.<br />Try to study in groups.<br />Chill – seriously. Don’t panic. Think fast.<br />

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