2. QUIZ 1. A kind of economy where many economic activities undertaken by private firms, others by the government 2. How do public goods cause market failures? Explain briefly.
3. QUIZ 3. Define paternalism 4. How can the gov’t solve/lessen externalities? 5. This is how the gov’t gets most of its revenue. Bonus: Peso-dollar exchange rate as of May 10, 2011
4. REVIEW Gov’t affects our lives from birth to death Mixed Economy - Many economic activities undertaken by private firms, others by the government
5. REVIEW Mercantilists – gov’t should promote trade and industry (18th) Adam Smiths’ response – Wealth Laissez faire Government should and could stabilize the level of economic activity
6. GOVERNMENT FAILURES Limited information Limited control over private market responses Limited control over bureaucracy Limitations imposed by political processes
7. FUNDAMENTAL QUESTIONS What is to be produced? PPF – public goods and private goods How should it be produced? Privately or publicly? For whom should it be produced? Distribution of benefits How are choices made – collectively
8. TAXATION Of two things you can be certain; death and taxes. -Benjamin Franklin. As old as gov’t itself As old as Biblical times Middle Ages – services to feudal lords Monetized taxes – payment in money instead of services
9. FORMS OF TAXATION Direct Taxes Personal Income Tax Corporate Income Tax Transfer Tax- gift tax estate tax Indirect Taxes Sales tax Specific tax – import/export tax
10. DIRECT TAXES Personal Income Tax All taxable income net of deductions Exemptions if single Resident and non-resident citizens receiving income from sources within or outside the Philippines Aliens, whether resident or not, receiving income from sources within the Philippines
11. DIRECT TAXES Corporate Income Tax On businesses (firms) Corporations no matter how created or organized including partnerships Estates and trusts engaged in trade or business Progressive Tax – as taxable base increases, tax rate increases
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13. DIRECT TAXES Transfer Tax Gift tax – imposed on right to transfer property during lifetime of transferer levied on donor Estate tax – imposed on right of an individual to transfer property at death
14. Levied on production and sales of goods and services Sales tax – imposed on all g/s exchanged in the country Tax rates vary by essentiality E-Vat INDIRECT TAXES
15. INDIRECT TAXES Specific tax – tobacco, alcohol, gas, oil, excise duties Export tax, import tax Regressive Tax – tax rate decreases as amount subject to taxation increases
16. DISTRIBUTION OF TAX Direct Taxes – more progressive Indirect Taxes – more regressive Philippines – in general progressive Argued that may be more regressive since indirect taxes are paid more Poorer individuals consume more of their income, therefore pay more indirect taxes
17. DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM Economic Efficiency – not interfere with efficient allocation of resources Administrative simplicity – easy and relatively inexpensive to administer Flexibility – able to respond easily (in some cases automatically) to changed economic circumstances
18. DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM Political responsibility – should be transparent Fairness – should be and should be seen to be fair, treating those in similar circumstances similarly and imposing higher taxes on those who can better bear the burden of tax
19. ECONOMIC EFFICIENCY Behavioral – work, education, savings, investment, marriage, divorce Financial – insurance, pension or direct investment Organizational – corporations and single proprietorship
20. ECONOMIC EFFICIENCY Announcement effects – effects are felt even before the tax is imposed Tax on real estate causes prices to drop markedly If I announce quiz about a new lesson, you’ll force yourself to read about it
21. ECONOMIC EFFICIENCY Nondistortionary Taxes – nothing an individual can do to alter his tax liability Lump-sum taxes Ex: Head tax – paid regardless of income or wealth Tax that depends on nonalterable characteristics
23. FAIRNESS Horizontal Equity – individuals who are the same in relevant aspects are treated the same Twins: A like chocolate ice cream, B likes vanilla ice cream Same price, but chocolate ice cream has higher tax SAME OPPORTUNITY SET
24. FAIRNESS Vertical Equity – some individuals are in a position to pay higher taxes than others and they should do so Example: Income tax During orals, I expect more from those who are B+ and A standing
25. GOVERNMENT REVENUE Tax Revenue (80-90%) Direct tax (50%) Indirect Taxes Non-tax revenue Asset sales Stocks Service fees
26. OTHER WAYS TO RAISE MONEY BOT – Build Operate Transfer Borrowing from Private Banks But private banks refuse LGUs not allowed to deposit in private banks Municipal Bonds
