The Fiscal Policy
Lesson 4
Fiscal Policy
• Refers to the actions and decisions implemented by
the government to have a stabilized and growing
economy particularly in times of recession and when
there is high inflation.
• Also, how the government allocates the taxes and
how it intends to spend, to stimulate the consumer
demands.
• It also involves the plans of the government to
improve other aspects of the economy such as
improving employment, lowering inflation,
appreciation of the peso, and other economic
strategies that would result to stable country.
There are several reasons why the government implements
a fiscal policy
To keep inflation at a
minimum or at its
most efficient level.
To keep an acceptable
To promote maximum
level of employment
purchasing power.
for the labor force.
Fiscal
Policy
Objectives
FISCAL POLICY IN TIMES OF:
[RECESSION] [DEMAND-PULL INFLATION]
• A situation where • A situation where increased
unemployment is high, low in prices is due to inability
local spending, decrease in of the supply, of goods and
demand, limited service, to meet the
investments) increasing demand of the
consumers.
RECESSION Demand-Pull Inflation
• Reduced Taxes • Decreased Government
• Increased Government Spending
Spending • Increased Taxes
• Combination of Increased • Combination of Decreased
Government Spending and Government Spending and
Reduced Taxes Increased Taxes
Taxation
• Important source of revenue for the governments’
funds.
• Tax is the major source of the government’s
revenue/income.
• A Tax is compulsory contribution mandated by law
and exacted by the government for a public purpose
• The major agencies that collect tax are Bureau of
Internal Revenue (assessment and collection of
internal taxes and other tax-related cases) and
Bureau of Customs (responsible for the assessment
and collection of the levies for imported and
exported products)
Taxation
• Is the process of imposing on and collecting taxes
from the citizens of a country.
• Persons or organization are compulsory to pay taxes
for it is necessary to government to provide the
needs of the country.
What is so important about taxes?
Taxation is needed for the government to effectively
operate.
Taxation is need to finance public goods such as
roads, bridges, schools, hospitals, parks, etc. the
money used to finance these goods and services are
from the people.
Tax is necessary to pay the country’s debt.
The government does not just impose payment of taxes;
in reality, they have legal bases for taxation:
The basic source of Philippine tax law is the National
Internal Revenue Law, which codifies all tax
provisions, the latest of which is embodied in Republic
Act No. 8424 (“The Tax Reform Act of 1997”).
The 1987 Philippine Constitution sets limitations on
the exercise of the power to tax.
The rule of taxation shall be uniform and equitable.
The congress shall evolve a progressive system of
taxation (Article VI, Section 28, paragraph 1)
Principle of Taxation
1. Tax depends on the ability to pay of an individual.
The bigger the salary, the higher the income tax and
the smaller the income, the lower the income tax or
none at all.
2. The people who gets greater benefits from the
government pay more taxes, such as: road tax, toll
fees, airport travel tax, etc.
3. Principle of certainty, economy and convenience
which means that the following must be observed in
paying taxes: time of payment, the manner of payment,
the quantity to be paid.
Structure of Taxation
1. Progressive – this structure is based on the ability of
the people and corporations to pay. This means that
the government imposes a higher tax as incomes
get bigger.
Income and wealth = tax as % of income
2. Regressive – in this kind of structure the rate of tax decreases as
income increases, because tax becomes part of the price of
goods and services bought by the consumers. Most of the indirect
taxes are regressive in nature.
Income and wealth = tax rate
Tax is part of the services and goods purchased by the consumers – an
indirect taxation)
Taxes imposed by the Government
INDIRECT TAXES DIRECT TAXES
These are taxes on These are charged or
expenditure. It becomes collected from the income
part of the price of goods or earnings of an individual
and services brought by or organization. This is the
the consumers. most significant source of
funds for the government.
• Value Added Tax (VAT) – • Income and Profit Tax – tax
this pertains the difference imposed on the yearly
between an entrepreneurs earnings of a person or a
selling price and the total corporation.
amount of the factors of • Transfer Tax – also called
production, e.g. employees donor’s gift tax, if the owner
salary, rent of the building, is still active. However, if the
cost of raw materials, etc. owner has died, the heirs
(12%) pay the “inheritance tax”.
• Excise Tax – imposed on all • Inheritance Tax – tax paid
the goods consumed within when you change
the Philippines whether ownership of a property.
imported or locally
• Real Property Tax – tax on
manufactured.
land, buildings, machines,
• Amusement Tax – the tax
etc. based on the assessed
allocated from the owner of
the casinos, cockpits, movie value of the property.
houses, bars, club, etc. (5%)
• Energy tax – a tax • Taxes on Winnings – taxes
imposed for every on the winnings in game
kilowatt-hour of shows, lotteries, raffles,
etc., unless otherwise if
electricity consumed.
the winnings were already
had been paid by the
sponsors and declared “tax
free” already
• Tariff – a tax or duty to
be paid on a particular
class of imports and
exports.
Rules of Taxation
1. Fiscal Adequacy. A good tax system must provide the
government with the sufficient revenues to enable it
to meet expenditures and carry out its functions for
the benefits of the people.
2. Convenience. Convenience in payment of taxes is an
important requirement of a good tax system. Payment
of taxes in four installment every three months.
3. Certainty. Simply means that the time of payment, the manner
of payment, and the amount to be paid are sufficiently clear to
those who are subject to the payment of taxes.
4. Justice. A tax should not be burdensome to the people who pay
it. Having the same amount of income or property has the same
amount of tax.
5. Economical. A good tax system should be simple and economical
to collect. If the cost of the collecting Php200 million in taxes is
Php190 million, the tax is economically unsound.
