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COVID 19 and Tax Policy Responses 4 (DJA) PDF
COVID 19 and Tax Policy Responses 4 (DJA) PDF
An Academic Perspective
Vid Adrison
Head of Economics Department
Disclaimer
The material in this presentation is the author’s personal opinion
and does not necessarily reflect the institutional opinion
Economic Activities: A Micro Perspective
• All of us have 24 hours a day
• Everyone has its own optimal time allocation for work, leisure, and other
activities
• Everyone is on the supply side in the input (labor) market
• We spend the optimal amount of time to produce a given service/product
• We earn income from our job
• Everyone is also on the demand side in output markets
• We spend our earned income on consuming products/services
• Under a normal condition, everyone will specialize in what they can
do the best
• Specialization results in more output (i.e., the economy grows)
The Pandemic Effect: A Micro
Perspective
• In the pandemic situation, our time allocation is NOT optimal
• Activities that require physical presence are reduced
• Increased risk causes the demand to fall
• Increased risk causes the average production cost to rise
• Demand for labor is reduced
• Labor income will fall
• It will affect the demand for other goods/services
The Pandemic Effect: A Macro
Perspective
• Keynesian Equation:
• Y=C+I+G+X–M
• C, I, X, and M will fall
•C : Mostly essential spending. Non essential spending will decrease
•I : High uncertainty will cause investment to fall
•X : Other countries will focus on basic needs (essential spending).
The demand for our export will fall
•M : Demand for import will fall
• G must be counter-cyclical to restore the economy
The Pandemic Effect
(A)S'
• Demand shock (A)S
• Increased risk of activities causes a (A)P
reduction in the demand
• Producers will produce less output
• The demand for labor will fall
• The demand for intermediate input
will fall
• Workers in the affected sectors (A)D
will experience a reduction in
their income (A)D’
• Demand for goods and services will
fall
(A)Y
• Downward Spiral??
The Effectiveness of Government
Spending in Economic Recovery
The Effectiveness of Government
Spending in Economic Recovery
The Effectiveness of Government
Spending in Economic Recovery
• Tax Incentive:
• Only those who remain in the business will utilize
• Capital Spending:
• Shift AS downward
• Increase AD
• However, budget absorption will still be the main challenge
• Subsidy
• Helps the private sectors to survive
• However, if the demand is still low (due to high risk of activities), the
beneficiaries will still have lower output
Theoretical Impact of Tax Incentives
• Theoretically, the tax incentives will shift the marginal cost function (i.e.,
individual supply function) to the Southeast
• However, if the producers still expect a low demand, production will be
less than the normal condition
• The demand for labor will fall
• Those who are unemployed will experience a reduction in their income
• SOME formal sectors, MOST informal sectors
• They need money to consume at least the subsistence level
• In short, only those who remain employed will enjoy the tax incentives
• The same logic is applicable for corporations
Final Remark
• The effectiveness of government spending in recovering the economy
depends on the degree of COVID 19 spread
• Effort to reduce the spread out will help the economy to recover