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Economics

Economics. Chapter 6 Government budget. Basic concept. Fiscal budget ( 財政預算 ) A statement of the government’s estimated revenue ( 收入 ) and expenditure ( 開支 ) for the coming fiscal year It states that how the gov’t receiveand spend money in the coming fiscal year

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Economics

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  1. Economics Chapter 6 Government budget

  2. Basic concept • Fiscal budget (財政預算) • A statement of the government’s estimated revenue (收入) and expenditure (開支)for the coming fiscal year • It states that how the gov’t receiveand spend money in the coming fiscal year • Fiscal reserve (財政儲備) • Fiscal reserve = Revenue – Expenditure • Amount that the gov’t keep for expenses • Fiscal year in HK • From 1st April to 31st March of the following year • Announcement of fiscal budget • Usually around late February to early March • To be voted in the Legislative Council

  3. Types of budgets • Surplus budget (盈餘預算) • Estimated revenue > Estimated expenditure • Balanced budget(平衡預算) • Estimated revenue = Estimated expenditure • Deficit budget(赤字預算) • Estimated revenue < Estimated expenditure Budget = Estimated

  4. Fiscal surplus and deficit At the end of fiscal year: • Fiscal surplus (財政盈餘) • Actual revenue > Actual expenditure • Fiscal reserve  • Fiscal deficit (財政赤字) • Actual revenue < Actual expenditure • Fiscal reserve  Fiscal = Actual

  5. At the end of fiscal year:

  6. Think about: In your own consideration: • Do you think the gov’t should increase subsidies in the above items for you?

  7. Public expenditure (公共開支) • Types of expenditure Functions : Examples • Education : 9-yr free education… • Support :wages of civil servants… • Social welfare : C.S.S.A…. • Health : medical services… • Infrastructure : transportation, water supply… • Security : police, law affairs… • Housing : Public housing… • Economic : postal, airport… • Environment and food: Environment protection • Community and external affairs: culture, sports…

  8. Government revenue • Types of revenue • Taxation • Direct tax • Indirect tax • Fee of selling of services • Medical services • Water supply • Application of ID card… • Fines / Penalties from punishment of illegality • Selling of land

  9. Taxation • Adam Smith’s principles of taxation • Equity • Taxation should be fair. • Taxes are directly proportion to people’s income,i.e. those who earn more income need to pay higher tax • Certainty • Clearly define the responsibilities to taxpayers • Clear tax calculation method • Clear tax payment deadline • Clear modes of payment(in person / online / PPS / credit card…)

  10. Taxation • Adam Smith’s principles of taxation • Convenience • Deadline & payment method: convenient to taxpayers • Allow enough time for payment • E.g. Salary tax in Hong Kong: • May: Submission of Tax Return – Individual • October: Notification of tax payment • January: First installment • April: Secondary installment • Economy • Cost of tax collection should be kept minimum. • Online / PPS tax payment   Cost of tax collection

  11. Tax base (稅基) • The tax base of an economic territory means • activities (e.g. buying car, taking flight overseas) • revenue (e.g. salaries, profits) • assets (e.g. properties, cars) on which taxes are charged. • The government’s scope of taxation. • Broader the tax base  more people need to pay tax  more source of taxation  more stable tax revenue

  12. Classification of tax • By tax burden • Direct tax • Indirect tax • By tax rate • Progressive tax • Proportional tax • Regressive tax

  13. Classification by tax burden • Direct tax • The tax burden cannot be shifted to others by taxpayers. • Examples: • Salaries tax • Charges directly on the salary • Profits tax • Charges directly on profit-making firms • Property tax • Charges directly on rental income earned from land or properties.

  14. Classification by tax burden • Indirect tax • The tax burden can be shifted to others by taxpayers • Examples: • Duties (應課稅品) • Liquors (酒類) • Tobacco(煙草) • Hydrocarbon(燃油) • Methyl alcohol(甲醇) • Rates(差餉) • Betting duty(博彩稅) • Stamp duty(印花稅) • First registration tax (汽車首次登記稅)

  15. Classification by tax burden • Indirect tax • How is the tax burden shifted? • Examples: • Duties:Tobacco • Gov’t charges tax on tobacco traders Tobacco traders raise the price of cigarettes  Consumers need to pay more for the cigarettes • i.e. The tax burden is shifted to consumers through increase in price •  all kinds of sales taxes are indirect tax

  16. Tax base: Direct tax vs. Indirect tax • Direct tax • Levied on companies and salaried workers • Only tax on profit or income earning • Number of taxpayers is limited • Even worse if no profit or salary •  Tax base is narrow • Indirect tax • Imposed on taxable goods and services • Tax on anyone who made consumption • Number of taxpayers is large •  Tax base is broader

  17. Tax base (稅基) Which of the following can broaden (擴闊)the tax base of Hong Kong? • Greatly decrease the basic tax allowance of the salaries tax. • Impose a general sales tax. • Increase the current indirect tax rate. • (2) only • (1) and (2) only • (2) and (3) only • (1), (2) and (3) Answer: B

  18. Stable tax revenue: Direct tax vs. Indirect tax Gov’t revenue fluctuates with economic cycles (經濟週期) • Direct tax • During economic recession (經濟衰退) • Companies: Low profit • Workers: Low salaries • Therefore, gov’t has less profit and salaries taxes • During the time of economic boom (經濟繁榮) • Greatly increase in tax revenue •  Tax revenue is not stable • Indirect tax • No matter what the time is, people need to consume •  Tax revenue is relatively more stable

  19. Tax rate and tax revenue:Why is there smuggling (走私)? • Suppose the gov’t wants to raise tax revenue • Way to achieve:  tax rate (e.g. duty on tobacco) • Traders shift the tax burden to consumer • People needs to pay more • To avoid higher price, consumers buy smuggled cigarettes •  incentive of smuggling market • Finally, lower tax revenue gained • Conclusion • Higher tax rate  illegal activities: smuggling and tax evasion (逃稅)   tax revenue   cost to fight crime

  20. Tax rate and tax revenue • Laffer Curve (textbook p.189) • Two extremes (e.g. salaries tax): • 0% tax rate  No tax revenue • 100% tax rate  All income paid for tax (i.e. no personal income)  No one will work  No tax revenue • Optimum level (t*) • If current tax rate < t*,  tax rate   tax revenue • If current tax rate > t*,  tax rate   tax revenue • To  tax revenue • Increase tax rate if tax rate < t* • Decrease tax rate if tax rate > t* Tax revenue ($) Tax rate (%) 0 100 t*

  21. Classification by tax rate • Basic terms • Taxable income • Tax rate • Tax payment • Basic calculation • Tax rate = • Taxable income = Total income – Tax allowance – Tax deduction e.g. parent, children… e.g. donation, study fee…

  22. Classification by tax rate • Calculate the tax rates on each person at different scheme.

  23. Classification by tax rate • Progressive tax(累進稅) • Higher the taxable income, higher the tax rate. • When taxable income increases, the tax rate increases.

  24. Classification by tax rate • Progressive tax • Relationship between • Taxable income • Tax rate Tax rate (%) 15 10 5 Taxable income ($) 0 300,000 100,000 200,000

  25. Classification by tax rate • Progressive tax • Relationship between • Taxable income • Tax payment Tax payment ($) 45,000 20,000 5,000 Taxable income ($) 0 300,000 100,000 200,000

  26. Classification by tax rate • Proportional tax(比例稅) • No matter the taxable income is, the same tax rate. • When taxable income increases or decreases, the tax rate remains unchanged.

  27. Classification by tax rate • Proportional tax • Relationship between • Taxable income • Tax rate Tax rate (%) 5 Taxable income ($) 0 300,000 100,000 200,000

  28. Classification by tax rate • Proportional tax • Relationship between • Taxable income • Tax payment Tax payment ($) 15,000 10,000 5000 Taxable income ($) 0 300,000 100,000 200,000

  29. Classification by tax rate • Regressive tax(累退稅) • Higher the taxable income, lower the tax rate. • When taxable income increases, the tax rate decreases.

  30. Classification by tax rate • Progressive tax • Relationship between • Taxable income • Tax rate Tax rate (%) 12 10 8 Taxable income ($) 0 300,000 100,000 200,000

  31. Classification by tax rate • Progressive tax • Relationship between • Taxable income • Tax payment Tax payment ($) 24,000 20,000 12,000 Taxable income ($) 0 300,000 100,000 200,000

  32. Indirect taxes are regressive taxes • Duty on tobacco ($1.706 per cigarettes) • Suppose 3 persons consume 1000 cigarettes per year. • Their income and tax payment on cigarettes are list below. • To simplify calculation, assume tax on each cigarette = $2 • Mr. A, with the least taxable income, pays the highest tax rate. • Mr. C, with the most taxable income, pays the lowest tax rate. •  It is a regressive tax.

  33. Hong Kong tax system

  34. Calculation of salaries tax Mr. A’s monthly salary in fiscal year 2010/11 = $40,000 • Annual salary = $40,000 x 12 = $480,000 • Personal allowance = $108,000 • Assume no other deductions • Then, taxable income = $480,000 - $108,000 = $372,000

  35. Calculation of salaries tax Mr. B’s monthly salary in fiscal year 2010/11 = $20,000 • Annual salary = $20,000 x 12 = $240000 • Personal allowance = $108,000 • Assume no other deductions • Then, taxable income = $240,000 - $108,000 = $132,000

  36. Calculation of salaries tax Mr. C’s monthly salary in fiscal year 2010/11 = $12,000 • Annual salary = $12,000 x 12 = $144,000 • Personal allowance = $108,000 • Assume no other deductions • Then, taxable income = $144,000 - $108,000 = $36,000

  37. Calculation of salaries tax • Mr. A: Higher the salary  Higher the tax rate • Mr. C: Lower the salary  Lower the tax rate •  Salaries tax is a progressive tax.

  38. Calculation of salaries tax (high income) Mr. D’s monthly salary in fiscal year 2010/11 = $80,000 • Annual salary = $80,000 x 12 = $960,000 • Personal allowance = $108,000 • Assume no other deductions • Then, taxable income = $960,000 - $108,000 = $852,000

  39. Calculation of salaries tax (high income) Mr. D’s annual salary in fiscal year 2010/11 = $960,000 • By usual calculation, tax payment = $208,440 • Tax rate = = 21.71% • Since tax rate > standard tax rate (15%) • Standard tax rate will be charged • Actual tax payment = $960,000 x 15% = $144,000

  40. Calculation of salaries tax (low income) Mr. E’s monthly salary in fiscal year 2010/11 = $6,000 • Annual salary = $6,000 x 12 = $72,000 • Personal allowance = $108,000 • Assume no other deductions • Then, taxable income = $0, because annual income < personal allowance • No need to pay salaries tax

  41. The structure of salaries tax in HK Tax rate (%) Progressive tax Proportional tax Standard tax rate Income ($) B A 0 Tax allowance

  42. The effects of tax on income redistribution 1. Narrow the gap between the rich and the poor • The government’s revenue and expenditure • Tax revenue from • the taxpayers who earn taxable salaries • the companies which gain profit • Expenditure • provide inexpensive or free services for the poor or low income earners • subsidies for the unemployed or low income groups • Progress income tax • Higher income earners pay higher a tax rate. • Lower income earners pay lower a tax rate.

  43. The effects of tax on income redistribution 2. Salaries tax be adjusted  A more equal income distribution • Increase the basic tax allowance • Personal allowance • Dependent children • Dependent parents/grandparents maintained by you • More low income earners can be excluded from paying tax

  44. The effects of tax on income redistribution 2. Salaries tax be adjusted  A more equal income distribution • Decrease the tax rates of all tax bands • That is,  tax rate of the first three bands of $40,000 taxable income • Lower tax burden of the middle class • More low and middle classes pay less tax burden.

  45. The effects of tax on income redistribution 2. Salaries tax be adjusted  A more equal income distribution • Increase the standard tax rate • Very higher income earners pay a standard tax rate • Increase in standard tax rate will affect high income groups only • More tax revenue can be collected from the high income groups

  46. The effects of tax on income redistribution 3. Goods and Services Tax (GST) • Suppose 20% GST is charged on buying a book ($100). • Therefore, $20 is the tax payment. • To a low income (income = $200) buyer, tax rate = = 10% • To a high income (income = $40,000) buyertax rate = = 0.05% •  GST is a regressive tax, more uneven income distribution.

  47. Argument of imposing GST in HK For • Broaden the tax base • Many examples from foreign countries, e.g. Japan, U.S.A. • Reasonable to “buy more goods, pay more tax” • Fair tax system. All people need to pay GST. Against • Increase tax burden • Worry of increase in tax rate • High cost of tax calculation • High cost of tax collection • P   Qd , lower consumption lower GDP • Destroy the simple tax system of HK • Income disparity

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