Public Finance Module 1 & 2 PDF

**COURSE CONTENT** **Module 1** The meaning of Public Finance, the nature and scope, the functions, the objectives, and its importance. 1. **Meaning of Public Finance** Basically, Public Finance is the study of the income and expenditure of the State. It deals only with the finances of the Gove...

**COURSE CONTENT** **Module 1** The meaning of Public Finance, the nature and scope, the functions, the objectives, and its importance. 1. **Meaning of Public Finance** Basically, Public Finance is the study of the income and expenditure of the State. It deals only with the finances of the Government. It includes on the study of the role of government in the economy. It is the branch of Economics which assesses the government revenue and expenditures of the public authorities and the adjustment of one or the other to achieve desirable ends. 2. **The Nature and Scope of Public Finance** Public Finance is both a Science and an Art. It is a science because we study about the principles, problems and policies underlying the spending and raising of funds by public authorities. It teaches how to collect taxes efficiently and effectively and how to spend the same efficaciously. It is an art, because it enables public authorities or concerned personnel to adopt the principles and policies in solving the financial problems of the Government in the best possible way to the maximum benefit of the society. The scope of public finance consists of the study of the collection of funds and their allocation between various branches of government activities which are regarded as essential duties of the State. Specifically, it includes the four activities namely: a. *Public Revenues* -- studies the various sources of revenues of the government. b. *Public Expenditures* -- studies the main principles of public expenditure. c. *Public debt* -- studies borrowing activities of the government. d. *Financial Administration* -- studies government controls or the problem of financial management. It covers matters on budget preparation, approval from legislature, the audit of Government accounts and other related matters. 3. **Functions of Public finance includes the following:** a. *Allocation function* -- There are two types of goods in an economy, the private goods like car is paid by a private individual so there is exclusivity in it. In contrast, the public goods like roads, public hospitals, bridges, schools and etc. are non- exclusive. The allocation functions deal with the allocation of such public goods. The government has to perform various functions such as maintaining law and order, defense against foreign attacks, providing health care and education, building infrastructure and etc. It needs huge amount of expenditures by the government so therefore allocation should be efficient and effective, that would mean development for the country and the people. b. *Distributive function* -- In a developing country like the Philippines, power distance is very glaring or disparity between the rich and the poor. The distribution function of public finance is to lessen the disparity or inequality between the rich and the poor through redistribution of income and wealth. In public finance there are three options or measures the government undertakes to bridge the gap. These are the following i. Progressive tax where higher taxes are charged to the rich or high- income group and exempt or giving subsidies to low income group ii. Progressive tax can be used to finance public service such as affordable housing, free education, health care and etc. iii. Higher taxes can be applied to luxury goods or goods that are purchased by higher income group like higher taxes imposed on luxury cars. c. *Stabilization function* -- Every economy experience instability like heavy inflation that sometimes led to recession, the stabilization function of public finance is to eliminate or reduce the impact of instability to the economy. Policies like deficit budgeting is used during the time of depression and surplus budgeting during the time of boom helps achieved the required economic stability. d. *Growth function* -- Maintain steady growth like high levels of employment and price stability are the primary growth functions of the government. These are achieved by coming up with fiscal and monetary policies that facilitates the ends of growth functions. 4. **The Objectives of Public Finance** The main objective of public finance is how to generate efficiently funds for the government to finance its development activities. It ensures equitable distribution of income within the society and helps the government regulate economic activities. Public finance also ensures efficient, effective and accountable use of public resources as basis for economic development and poverty eradication through improved service delivery. 5. **The Importance of Public Finance** Prior to Great Depression or the severe worldwide economic depression, the importance of public finance was focused on war or aggressions were income of the State was used to finance the making of weapons and armaments. The importance of public finance was felt only in the 20^th^ century where every government after the Great Depression ensures *social welfare* of its citizen. **Module 2** Public Revenue Government/Public Revenue includes the meaning of Public Revenue, its sources and classification, Taxation as source of public revenue, other sources of public revenue and issues in public revenue generation. 1. **The meaning of Public Revenue** Public Revenue refers to the income of the government through all sources. According to Dalton, public revenue, in its wider sense, includes all the incomes or receipts which a public authority may secure during any period of time. In its narrow sense, public revenue includes only those sources of income of the public authority which are ordinarily known as "revenue resources". [*https://www.yourarticlelibrary.com/finance/public-revenue-meaning-tax-revenue-non-tax-revenue-with-classification-of-public-revenue/26277*](https://www.yourarticlelibrary.com/finance/public-revenue-meaning-tax-revenue-non-tax-revenue-with-classification-of-public-revenue/26277) 2. **Sources and classification of Public Revenue** **[SOURCES]** Public Revenue is of two types: (a) Tax Revenue; and (b) Non-tax Revenue. *Tax Revenue refers to a fund raised through various taxes, which is further classified into: Direct and Indirect Taxes.* *Direct Taxes* - Corporation Tax- refers to taxes against profits earned by businesses during a given taxable period. - Income Tax -- refers to taxes that government impose on financial income generated by all entities within their jurisdiction. - Expenditure Tax -- refers to the taxation plan that replaces the income tax, which is based on the rate of spending. - Service Tax -- refers to taxes payable on service provided by the service provider. *Indirect Taxes* - Custom Duties -- are indirect taxes levied on goods imported into a country as well as on goods exported from a country. - Excise Duties -- are levied by the state on the manufacture or production of goods. - Sales Tax -- are levied on the sale or purchase of goods. *Non-tax Revenue refers to public income received through the administration, commercial enterprises, gifts and grants.* *Commercial Revenue* - Refers to all types of revenue which are derived by the government from public enterprises by selling their goods and services. *Administrative Revenue* - Fees -- payment to the government for the services that is rendered to the people. - Escheat -- refers to the income of the state which arises out of the property left by the people without a legal heir. - Fines -- payment which is made by lawbreakers to the government by an economic punishment *Grants and Gifts* - Gifts -- voluntary contribution from private individuals to the government fund for specific purposes. - Grants -- are received from foreign countries in the form of foreign aid, which may be military, economy, and technical type. *Other Income* - Income from public property - Deficit financing - Voluntary loans [ ] **[CLASSIFICATION]** [ ] *Seligman's Classification* - Gratuitous Revenue -- refers to revenues received by public authorities free of cost and are voluntary in nature. Gifts, donations, and grants fall into this category. - Contractual Revenue -- refers to revenues which arise from the contractual relations between the public authority and the people. Fees and prices fall into this category. - - Compulsory Revenue -- refers to income derived from administration, justice, and taxation. Taxes, and fines fall under this category. *Dalton's Classification* - Taxes -- as: (a) Taxes; (b) Compulsory Loan; (c) Income arising as tributes and indemnities; (d) Pecuniary Penalties for offenses. - Prices -- subdivided into: (a) Receipts from public property; (b) Receipts from public enterprises; (c) Fees or payment made for services; (d) Receipts of Voluntary public loans. *Taylor's Classification* - Grants and Gifts - Administrative Revenue - Commercial Revenue - Taxes [*https://www.yourarticlelibrary.com/finance/public-revenue-meaning-tax-revenue-non-tax-revenue-with-classification-of-public-revenue/26277*](https://www.yourarticlelibrary.com/finance/public-revenue-meaning-tax-revenue-non-tax-revenue-with-classification-of-public-revenue/26277) [*http://www.economaldives.net/2012/04/topic-20-income-and-expenditure-of\_8322.html*](http://www.economaldives.net/2012/04/topic-20-income-and-expenditure-of_8322.html) [*https://www.accountingnotes.net/financial-management/public-revenue/public-revenue-meaning-and-classification/10022*](https://www.accountingnotes.net/financial-management/public-revenue/public-revenue-meaning-and-classification/10022) 3. **Taxation as a Source of Public Revenue** - Taxation is through the Bureau of Internal Revenue which comes under the Department of Finance. - Individual resident foreigners who derive their income from all sources in the Philippines and in foreign countries are taxed from 1-35% on gross compensation income. - 20% on royalties, prizes, and winnings. Income derives from royalties includes earnings from copyrights, patents, and trademarks. For prizes and winnings, contests, awards and prizes for commercial and non-commercial contests are generally taxable. If the prize is 10,000 and below, it is taxable under section 24A. If it is above 10,000 then the final tax of 20% is applied. - 20% interest on bank deposit and substitute arrangements and 5% capital gains tax on sale of realty. - Taxation is a way of raising income in order to defray the necessary expenses of the government. - It is the inherent power of the state to demand contribution to finance all the government expenses. a. **The Theory and Incidence of Taxation** i. *Benefit Theory* -- according to this theory, the state should levy taxes on individuals according to the benefit conferred to them. The more benefits a person derives from the activities of the state, the more he should pay to the government. ii. *The Cost of Service Theory* -- if the state charges actual cost of the service rendered form the people, it will satisfy the idea of equity or justice in taxation. The cost of service principle can no doubt be applied to some extent in those cases where the services are rendered out of prices and are a bit easy to determine. iii. *Ability to Pay Theory* -- the citizens of a country should pay taxes to the government in accordance with their ability to pay. b. **Classification of taxes based on Tax base** A Tax Base is a total amount of assets or income that can be taxed by taxing authority, usually by the government. It is used to calculate tax liabilities. This can be in different forms, including income or property. i. *Property Tax* -- tax that is imposed on one's property, whether it is real property or personal property in proportion with the property's value. ii. *Income Tax* -- tax on all yearly profits arising from property, profession, trades or offices, or as a tax on a person's income, emoluments, profits, iii. and the like. iv. *Estate Tax* -- tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death. v. *Donor's Tax* -- tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of the transfer. c. **Classification of Taxes based on Tax incidence** i. *Direct Tax* -- tax that is directly demanded from and paid by the taxpayers. This includes Personal Tax, Corporate Tax, Wealth Tax, Interest Tax, Gift Tax, Expenditure Tax, etc. ii. *Indirect Tax* -- tax that is demanded from a certain person in the intention as well as expectation that the particular person shall indemnify himself at the expense of another. These are imposed on goods and commodities. This includes Sales Tax, Excise Duty, Service Tax, Customs Duty, VAT, etc. iii. *Specific Tax*- tax that is of fixed amount that is imposed by the head or number, or by some of the standard of the weight and measurement. iv. *Ad Valorem Tax* -- tax that is of fixed proportion in relation with the value of the property in respect to which the tax is assessed. d. **Classification of Taxes based on Tax rate** A tax rate is the percentage at which an individual or corporation is taxed. The tax rate is the tax imposed by the federal government and some states based on an individual's taxable income or a corporation's earnings. i. *Proportional Tax --* tax that is based upon the fixed percentage vis-a-vis the amount of the property or other bases on which to be taxed. ii. *Progressive or Graduated Tax --* tax rate increase upon the increase of the base rate. iii. *Regressive Tax --* tax rate decreases upon the increase of the base rate. [*https://batasnatin.com/law-library/taxation-law/general-taxation/277-sources-of-revenues-taxation.html*](https://batasnatin.com/law-library/taxation-law/general-taxation/277-sources-of-revenues-taxation.html) [*https://www.yourarticlelibrary.com/finance/public-revenue-meaning-tax-revenue-non-tax-revenue-with-classification-of-public-revenue/26277*](https://www.yourarticlelibrary.com/finance/public-revenue-meaning-tax-revenue-non-tax-revenue-with-classification-of-public-revenue/26277) [*https://kittelsoncarpo.com/taxes/*](https://kittelsoncarpo.com/taxes/) [*https://economicsconcepts.com/diffusion\_theory\_of\_taxation.htm*](https://economicsconcepts.com/diffusion_theory_of_taxation.htm) [*https://www.yourarticlelibrary.com/economics/taxation/incidence-of-taxation-meaning-shifting-the-burden-of-a-tax-and-other-details/38154*](https://www.yourarticlelibrary.com/economics/taxation/incidence-of-taxation-meaning-shifting-the-burden-of-a-tax-and-other-details/38154) [*https://www.investopedia.com/terms/t/taxbase.asp*](https://www.investopedia.com/terms/t/taxbase.asp) [*https://www.investopedia.com/terms/t/tax\_incidence.asp*](https://www.investopedia.com/terms/t/tax_incidence.asp) [*https://www.yourarticlelibrary.com/economics/taxation/what-is-tax-meaning-and-classification-of-tax-explained/38119*](https://www.yourarticlelibrary.com/economics/taxation/what-is-tax-meaning-and-classification-of-tax-explained/38119) [*https://www.investopedia.com/terms/t/taxrate.asp*](https://www.investopedia.com/terms/t/taxrate.asp) 4. **Issues in Public Revenue Generation** a. **We have some of the highest income tax rates in the region.** *[Principle of Taxation]* -- High income taxes could discourage firms from producing more goods or employees from working more hours. Hence, a good tax system makes sure that income tax rates are not too high so as to discourage economic activity. *[Problem]* -- The Philippine tax system has some of the highest income tax rates in the region compared other ASEAN countries. In 2016, our corporate income tax was at 30%, which turns off foreign investors. Our personal income tax rate was at 32%. b. **Too many goods and services are not being taxed.** *Principle of Taxation* -- A good way to reduce high tax rates is to expand the tax base, or the set of goods and services which are taxed. The same (or even a larger) tax revenue can be collected as before by imposing a lower tax rate on as many goods and services as possible. *Problem* -- In the Philippines, too many goods and services are exempted from taxes. c. **Too many people are evading the tax system.** *Principle of Taxation* -- Another way to widen the tax base (in order to reduce tax rates) is to tax as many people as possible. But the more people can get away with not paying their taxes (or otherwise hide their income), the more difficult it will be to reduce tax rates. *Problem* -- Too many Filipinos can get away with not paying taxes. There are tax evaders who are nearly impossible to catch and prosecute given our overly strict bank secrecy law. In addition, "compensation earners" or those who earn salaries or wages, end up paying more in taxes than the self-employed and the professionals (who have some ability to hide part of their incomes). As a result, from 2010 to 2013, compensation earners earned 60% of total incomes in the country but paid as much as 80% of all taxes.