2. QUIZ 1. A tax on sales of goods and services, domestically produced or imported, at each stage of the production and distribution process 2. The EVAT Law of 2005 increased EVAT from 10% to ______.
3. QUIZ 3. Reformed structure of the Sin Taxes wherein a fixed amount is charged per unit of good sold. 4. True economic weight of a tax 5. Measures who actually pays the tax BONUS: Peso-dollar exchange rate (May 12)
4. REVIEW Utilitarianism Social U = MU1 = MU2 = MU3 = MU4= MUN Rawlsian Social U = UPoorest
5. 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 Destination Principle Self-policing Feature
6. EXPANDED VAT (2005) Why: addt’l revenue, cut budget deficits New VAT Rate Shift in nature of VAT VAT coverage Non-VAT provisions
7. EXPANDED VAT (2005) Output-reducing effect from increasing VAT 1012% Additional burden on firms from input VAT credits for capital equipment distributed over
8. 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
9. SIN TAXES Ad Valorem – percentage of Adjusts to inflation, keeps real value Misdeclaration of value of product Specific Taxes - Fixed amount per unit Prevents misdeclaration Fails to adjust to inflation Sol’n: indexation
10. 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
12. 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
13. 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 Shifting down the demand curve
14. TAX BURDEN Borne by consumers Tax decreases consumption Income effect: Less money Borne by producers Producer surplus = between SC and P Rev – TVC
15. EFFECTS OF A TAX Consumer surplus – amount buyers are willing to pay for the good and amount they actually pay for it Area above the price line and below the demand curve
16. No tax consumer surplus: A+B+C No tax producer surplus: D+E+F
17. EFFECTS OF A TAX Producer Surplus – Amount sellers receive for a good minus their costs Area below the price line, above the supply curve Consumer+Producer surplus measures the welfare in society
18. No tax consumer surplus: A+B+C No tax producer surplus: D+E+F
19. EFFECTS OF A TAX After tax, total welfare is now divided into Consumer Surplus and Producer Surplus Gov’t Tax Revenue (TQ) Deadweight Loss – fall in total surplus that results from a market distortion such as a tax
20. Supply Size of tax Price buyers pay Price without tax Price sellers receive Demand Quantity Quantity without tax with tax Buyers’ PriceSellers’ price Quantity 0
21. Supply A Price buyers PB = pay B C Price P1 = without tax E D Price sellers PS = receive F Demand Q2 Q1 Price Quantity 0
22. EFFECTS OF A TAX Incentive for consumers to buy less Incentive for producers to produce less Both are worse off Market is below optimum
24. EXAMPLE When you ride a tricycle and pay P25 Tricycle driver – value for ride is P20 Tricycle rider – value for ride is P30 Both receive P5 benefit Total surplus – P10 Both gain from the trade
25. EXAMPLE Suppose gov’t levies a P20 tax on tricyle rides Most that riders are willing to pay is P30 But then tricycle would be left with P10 after paying tax (P30-20=P10), less than his willingness which is P20 For driver to receive P20, rider should pay P40 but willingness is only P30
26. EXAMPLE Result: No trade happens Riders will prefer not to ride anymore Each loss surplus of P5 Total deadweight loss is P10 No tax revenue since trade was cancelled
27. DETERMINANT OF DWL Price elasticities of supply and demand The greater the elasticities of demand and supply the larger the decline in equilibrium quantity and, the greater the deadweight loss of a tax
28. Supply When supply is relatively inelastic, the deadweight loss of a tax is small. Size of tax Demand INELASTIC SUPPLY Price 0 Quantity
29. When supply is relatively elastic, the deadweight loss of a tax is large. Supply Size of tax Demand ELASTIC SUPPLY Price Quantity 0
30. Supply Size of tax When demand is relatively inelastic, the deadweight loss of a tax is small. Demand INELASTIC DEMAND Price Quantity 0
31. Supply Size of tax Demand When demand is relatively elastic, the deadweight loss of a tax is large. ELASTIC DEMAND Price Quantity 0
32. DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY With each increase in the tax rate, the deadweight loss of the tax rises even more rapidly than the size of the tax.
34. Deadweight loss PB Supply Tax revenue PS Demand Q2 Q1 MEDIUM TAX Price When the tax rate doubles, the deadweight loss quadruples Quantity 0
35. PB Deadweight loss Supply Tax revenue Demand PS Q1 Q2 LARGE TAX Price Quantity 0
36. 36 DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY Tax revenue = tax rate × quantity bought and sold TR = T × Q T↑ causes Q↓ Therefore, the effect of T↑ on TR is ambiguous T↑ causes TR↑ when the tax rate (T) is low T↑ causes TR↓ when the tax rate (T) is high This gives us the Laffer Curve
37. T1 LAFFER CURVE Note that it makes no sense at all to make the tax size bigger than T1. Tax Revenue Tax Size 0
38. 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
39. RANDOM NUMBERS Will be called in groups of five Line up and sign up Remember your schedule Show up on the day itself MOVE FAST! :D
40. RANDOM NUMBERS Kross, Kim Go, Gabe, Jer, Carlo Daryll, Berna, Patty, Duane, JL Sean, Enzo, Therese, Ramon, Sela DBC, Mari, Lizzie, Deanna, Rico Belli, Raissa, Andro, Papu, Leo Bianca, Carol, Jaime, Neo, Zablar Suar, Pam, Em, Josh, Nica
