2. QUIZ – True or False 1. Personal Income Tax is a nondistortionary tax. 2. Landing fees at airports is an example of an indirect tax. 3. The Phil. Tax system is net regressive.
3. QUIZ – True or False 4. The regressive nature of the Value Added Tax shows Vertical Equity. 5. Estate tax is imposed on the right of an individual to transfer property during the lifetime of the transferer levied on the donor. BONUS: The “Father” (or principal author) of the E-Vat Law of 2005
4. FORMS OF TAXATION Direct Taxes - Progressive Personal Income Tax Corporate Income Tax Transfer Tax- gift tax estate tax Indirect Taxes - Regressive Sales tax Specific tax – import/export tax
5. DISTRIBUTION OF TAX Direct Taxes – more progressive Indirect Taxes – more regressive Philippines – in general progressive Argued that more net regressive
6. DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM Economic Efficiency Administrative simplicity Flexibility Political responsibility Fairness
10. GOVERNMENT REVENUE Tax Revenue (80-90%) Direct tax (50%) Indirect Taxes Non-tax revenue Asset sales Stocks Service fees
11. OTHER WAYS TO RAISE MONEY BOT – Build Operate Transfer Borrowing from Private Banks Municipal Bonds
12. FRAMEWORKS Utilitarianism – MU of income – loss in utility of taking P1 from someone – should be same for all individuals If MU1 > MU2, reduce income of 1 and increase income of 2 by same amount Basis for progressive taxation Raising tax on higher income may reduce work effort Rawlsian – increase tax rate on everyone except worst off, until revenue maximized
13. VALUE-ADDED TAX (VAT) A tax on sale of goods and services, domestically produced or imported, at each stage of the production and distribution process Form of sales tax Burden is borne by final consumers of VAT-able g/s
14. VALUE-ADDED TAX (VAT) Destination principle: taxed on basis of where it is consumed, instead of where it is produced Self-policing feature: all firms required to show evidence of tax paying
15. EXPANDED VAT (2005) Why: addt’l revenue, cut budget deficits New VAT Rate Shift in nature of VAT VAT coverage Non-VAT provisions
16. EVAT – New Tax Rate 10% retained but President has authority to raise it to 12% by Jan. 1, 2006 if either one of these exists: VAT collections in 2005 exceed 2.8 percent of gross domestic product (GDP) National Government deficit for 2005 exceeds 1.5 percent of GDP
17. EVAT – Shift in nature of VAT Firms are no longer allowed to immediately claim full credit for the VAT they paid on capital goods. Required to spread out their claim for VAT credit on capital good purchases over five years
18. EVAT – Shift in nature of VAT Places a cap on the amount of VAT credit that firms may claim for their input purchases
19. EVAT – VAT Coverage Some exemptions from VAT were lifted Ex: coal and petroleum products Services rendered by doctors of medicine and by lawyers Sale of works of art, literary works, musical composition and similar creation VAT base effectively broadened
20. EVAT – Earmarked Funds Before, all funds straight to Treasury Half of the LGU’s share in the incremental VAT collection is for social and economic services 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
21. EVAT – Earmarked Funds 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
22. EVAT – Non-VAT Provisions raising of the corporate income tax rate from 32 to 35% to 2009 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
23. EXPANDED VAT (2005) Output-reducing effect from increasing VAT 1012% Additional burden on firms from input VAT credits for capital equipment distributed over
24. SIN TAXES Levied on certain socially undesirable goods and services to discourage the public’s consumption. E.g. alcohol, tobacco Converted from ad valorem to specific taxes
25. SIN TAXES Ad Valorem – percentage of Adjusts to inflation, keeps real value Misdeclaration of value of product Ex: 30% of cigarette sales If sales = P100,000 Sin Tax = P30,000
26. SIN TAXES Specific Taxes Fixed amount per unit Prevents misdeclaration Fails to adjust to inflation Sol’n: indexation Ex: If P5 per cigarette stick and 300 sticks sold, tax = P1500
27. TAX ISSUES Tax performance - degree at which tax base has been exploited to mobilize gov’t resources Indices of Tax performance Tax ratio – taxes/GNP Tax effort index (taxable capacity)– actual/predicted ratios
28. TAX ISSUES Tax burden – true economic weight of a tax Diff bet real income before and after tax Tax incidence – whose real income is lowered Who actually pays Equivalent taxes – same effect
29. TAX ISSUES Tax incidence in competitive markets No diff if tax is imposed on consumer or on producer Does not matter if ad valorem or specific Ad valorem tax – percentage of price Shifting down the demand curve
30. EQUIVALENT TAXES Income tax and VAT (w/o exempt’n) For every prod’n, corresponding income Uniform sales tax Consumption taxes and VAT (w/ ex) On consumer goods Consumption and wage taxes Lifetime income and consumption Eq in the LR
31. Factors in Tax Incidence Time span: More elastic in LR Open vs Closed eco: SC of factors more elastic in open Mix of policy changes
32. IMPROVING TAX COMPLIANCE Tax Evasion – illegal means to avoid paying taxes Underdeclaration of sales Overdeclaration of claims for input VAT Misdeclaration of income Tax Avoidance – legal means to avoid paying taxes
33. TAX BURDEN Borne by consumers Tax decreases consumption Income effect: Less money Substitution eff: increase in relative price Size of subs eff: shape of IC Borne by producers Producer surplus = between SC and P Rev – TVC
34. SCHEDULE May 13-18 – remaining topics Thursday, May 19 – Video Presentation Friday, May 20 – Review Session OR finals Monday, May 23 – finals
35. FINALS Thesis statements? Comprehensive Intuitive before math and graphing Provide examples 10 minutes per person Sign-ups today by random number 8-12nn, 1pm-4pm
36. TIPS FOR FINALS DO NOT CRAM. Study each lesson and their relationships. Go there at least 15 minutes before your sched. The dept couch can only accommodate up to 3 persons. Maximize your cheat cards. To be submitted on Thurs – May 19
37. TIPS FOR FINALS Use your own words. Don’t invent complicated examples. Try to study in groups. Chill – seriously. Don’t panic. Think fast.
