BINTAXA OTE001

May 29, 2021

Ong, Reyes, Tanedo, Vicencio, Vizcarra

1. What is the primary purpose of taxation? Discuss this purpose and give one example of how
it operates.

Revenue or fiscal. The primary purpose of taxation on the part of the government is to provide
funds or property with which to promote the general welfare and the protection of its citizens and
to enable it to finance its multifarious activities, adjacent to raise revenue to meet huge public
expenditure. Most governmental activities must be financed by taxation. Taxes are used b y the
government to meet the demands of their societies. Taxes are important because governments
use these as funding for their projects and other responsibilities.

Example: The income of residents in the Philippines is taxed progressively up to 32%. Resident
citizens are taxed on all their net income derived from sources within and without the
Philippines. A nonresident, whether an individual or not of the Philippines, is taxable only on
income derived from sources within the Philippines. The government has been the traditional
funder of infrastructure, as well as its operator. In this kind of purely public model, the
government uses tax or bond revenues to fund projects.

Some of these projects include:

• Health
Taxes are used for public health, including the funding for the operation of public
hospitals.
• Education
Governments fund the development of human capital and education is central in
this development. Money from taxes is used in building and maintaining the
public education system.
• Governance
The taxes are mainly used for running the country affairs. Taxes are used to pay
public servants, police officers, members of parliaments, the postal system, and
others.

Other important sectors are infrastructure development, public transport, housing, etc.
Apart from these, taxes are also used for the development of the well-being of the citizens
including security, scientific research, environmental protection, pensions, unemployment
benefits, childcare, etc.
2. Give two (2) non-revenue or secondary objectives of taxation. Discuss each and give one
example for each.

a) Imposition of tariffs on imported goods to protect local industries. Tariffs are taxes on
imports. They effectively raise the prices of those imports, providing an edge to local industries
in the same markets. Governments usually impose tariffs to help domestic companies, or
sometimes to punish foreign competitors for unfair trading practices.

Example: Rice is considered the country’s most sensitive agricultural product. In 2002, the
Philippine Government opened its rice market when it allowed the private sector, mainly traders,
to import rice. Prior to this, the National Food Authority (NFA) was the sole importer of rice. Rice
imports are assessed a 40 percent in-quota tariff and a 50 percent tariff for volumes beyond the
quota.

b) The increase or decrease of taxes to prevent inflation or ward off depression. Taxes
alone offer the best means of preventing the progress of inflation. They are also the means of
getting existing inflation under control. The best method to stabilize a currency is contraction.
The State should obtain control of all outstanding currency and the best means of so doing is
the use of taxes.

Example: The charges placed by the government on goods/income. For example, VAT is a tax
which means consumers have to pay an additional 20% of the price in the form of tax which
goes to the government. VAT will cause an increase in the price of the goods to which it applies.
So there will be an immediate spike in inflation caused by the introduction of the tax, followed by
a long-term deflation as the new tax extracts extra money from the economy. The additional
extraction will reduce the size of the money supply, making money scarcer and thus more
valuable.