Bulacan State University

Malolos City
1 Trimester, 2021-2022
st

Assignment No. 01

Tadeo, Fernando IV F.
Program: Master in Public Administration
Course Code: PA 501
Subject: Public Policy and Program Administration

Premise of the Causal Framework

In accurately conducting a root cause analysis, the causal loop diagram or
framework based on the general systems theory was used. This approach 1:
1. Views the organization as a united, purposeful system composed of
interrelated parts.
2. Gives leaders, policymakers and managers a way of looking at the whole
organization, whole person, whole group, and the whole social system.
3. Tells us that the activity of any segment of an organization affects, in
varying degrees the activity of every other segment.

Policymakers were able to identify the problems of Bustos, Bulacan’ low economic
performance, viz.:
1. Low consumption due to weak consumer purchasing power; and
2. Low private sector investments.

Based on the systems story, moreover, the Local Chief Executive and the
Sangguniang Bayan were able to figure out the impacts and consequences of
possible interventions: A blend of policies based on two countervailing economic
approaches. Policymakers sought a balance of the two.

The objectives of the systems thinking approach for this specific set of variables
were to:
1. Improve the revenue performance of the Municipal Local government by
broadening the tax base and adjusting the rates in consideration of the
value of currency and inflation;
2. Enable the local government to expand its social services and invest in the
human capital of the people to pull themselves out of poverty; thus, making
them productive citizens in the future contributory to development, cutting
expenditures and deficits in the long run;

1 Stroh, D. P. (2015). Systems Thinking for Social Change: A Practical Guide to Solving Complex

Problems, Avoiding Unintended Consequences, and Achieving Lasting Results. White River
Junction, Vermont: Chelsea Green Publishing.

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 3. Establish a more rationalized classification of industries for a more
rationalized taxation system, cutting loopholes in the process and
instituting fairness in the tax code; and
4. Provide tax incentives to investors to create more jobs for the people
towards inclusive economic growth.

The theoretical findings were then used as a guide to develop the 2014 Revenue
and Investment Incentives Code of Bustos, Bulacan.

Variables and Interrelationships

B3 to 1. The causal loop diagram lays out two countervailing economic

R3 approaches for the Municipality of Bustos: trickle down or supply-
side and trickle up or demand-side.

Both approaches tackle the burden of higher tax rates whether on

high earners or the low earners.

Supply-side economics supports low tax rates on high earners,

which will result invariably to less local government revenue and,
therefore, less local government per capita spending. Loss in
revenue; however, will be offset by higher tax rates on middle- and
lower-income earners.

Meanwhile, demand-side economics supports higher tax rates for

high earners to boost local government revenue and local
government per capita spending. The potential risk of less local
government per capita spending resulting from lowering tax rates

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 on middle- and lower-income earners will be offset by imposing
higher tax rates on high earners.

R3 to 2. Theoretically, lowering tax rates increases income. Lowering or

R6 raising taxes on either high earners or low earners will result to
lower or higher incomes of either of the two.

R6 to 3. By lowering tax rates, higher earners can enjoy higher incomes. By

B5 raising their taxes, the result is lesser income. If demand-side
economics is in place, the higher income a person generates, the
higher taxes will be imposed. This is contrary to supply-side, which
supports less taxes for high earnings.

B5 to 4. Lower taxes for high earners, theoretically, will boost capital

B2 investments by the private sector as individual incomes of high
earners increase or remain intact. As high earners seek more profit,
their tendency is to expand businesses or use new income to invest
in new businesses to earn more profit. However, opponents to this
theory suggest otherwise. Raising taxes for high earners will
generate more local government revenue. Local government will
use that revenue to spend more per capita resulting to more public
sector capital investments such as roads, bridges, transportation,
health care and education.

B2 to 5. Supply-side proponents argue that private sector and free markets

R5 should and can ably provide for the public need, such as land
development, transportation, hospitals and schools. By lowering
tax rates for high earners, capital investments will increase due to
increase in incomes.

R5 to 6. More private sector capital investments will result to more incomes,

R7 which will be spent for more capital investments. When new
incomes are generated, investors will have the capacity to expand
their businesses or create new businesses and provide for the
society in exchange for profit.

The influx of new businesses and the increase in the number of

investments, moreover, will boost competition and thus lower the
prices of products and services, which will benefit the public in
general and encourage the private sector to improve their products
and services to attract buyers and retain customer loyalty.

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R7 to 7. Demand-side proponents support otherwise. Raising taxes on high
R9 earners will boost local government per capita spending and public
sector capital investments. The more local government invests in
infrastructure, education and health care, the more public sector
jobs will be created for the middle and lower classes. With more
jobs, lower earners will accumulate more income. Meanwhile,
supply-side economists believe that the more private sector invests,
the more jobs will be created, and more incomes will be produced
for both high and lower classes.

R9 to 8. Either way, more private or public capital investments will create

B8 more jobs and increase incomes. When incomes increase,
individuals acquire greater spending power. With more spending,
however, personal incomes decrease.

B8 to 9. Higher incomes, particularly for the middle and lower classes, will
B9 increase an individual’s propensity to spend. The more a person
spends, the less savings the person accrues. The less the person
spends, however, the more savings the person acquires.

B6 to 10. As low earners have more propensity to spend and consume to

B7 sustain their daily needs, demand-side economists argue that by
lowering tax rates for low earners, individuals may be able to save
the bigger portion of their incomes earned from their wages. Lower
taxes will then increase savings. More savings will encourage,
however, more spending leading to lesser incomes, which will eat
up their savings as a result.

R10 to 11. Meanwhile, for supply-side proponents, higher capital investments

R11 require more means of production to be established. As both
investments and the supply chain grow, more private sector jobs
are created in the process, and more incomes are made available.

R11 to 12. The increase in the means of production is driven by the increase
R12 in the public consumption of goods and services, which is propelled
by the growing propensity to spend resulting from a surge in income
due to the increase in the number of jobs created. With more
incomes, the public tends to spend and consume more, and this
cycle drives the supply and demand chain, and reinforces the free
market economy in general.

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R12 to 13. As consumption increases, production increases at the same time
R13 to fulfill the demand for goods and services. However, demand-side
economic theory suggests that high tax rates imposed on low
earners will result to less incomes. People’s spending habits and
therefore consumption will dramatically reduce. Less consumption
or underconsumption will cause market gluts or the surplus of
goods and services that are not cleared at the shelf. This will result
in a substantial fall in the prices of goods and services, which will
eventually cause stop production, the closure of factories and the
reduction of the supply chain in the long run, and the possibility of
unemployment in the future.

B10 to 14. Therefore, in time, underconsumption, coupled with

B11 overproduction, eventually results to market gluts. Consecutive
and long-term market gluts lead to economic recession or the
decline of the locality’s GDP (gross domestic product) for at least
two consecutive quarters. Because people earn less than they
produce, they cannot buy back as much as they produce. As the
recession and depression (long-term recession) continue, business
profits drastically decline, and companies will lay off workers as
means of production are reduced or ceased.

B1 to 15. To prevent this phenomenon from occurring, supply side

R4 proponents urge less economic management or less intervention
and control from the local government. This means that private
sector regulation is substantially decreased to allow the private
sector to act freely and invest without interference from the local
government. They argue that the lesser private sector regulation,
the more investments will be made. As mentioned, supply-side
economists believe that the free market can provide for society. This
means that the less local government has control of the domestic
economy, the public funding for local government per capita
spending will decrease; thereby, spurring further capital
investments from the private sector to provide for the public need
to offset the decrease in local government services. However, less
regulation coupled with unhindered and uncontrolled private sector
capital investments will result to less management and protection
of the natural and built (man-made) environment. Supply side
proponents argue that the private sector can regulate itself.

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R4 to 16. Demand-side proponents argue otherwise. With more local
R1 government control and regulation, private sector investments will
be ensured to comply with environmental and fair-trade
regulations. This means that damage to the economy and the
ecology will be minimized, pollution will be controlled, and the
negative social and environmental impact of businesses will be
managed to a minimum.

The more public sector investments made by the local government

and the more the environment is protected and guaranteed ensure
community livability in the long term. Community livability is
measured by the availability and quality of the built environment
(housing, transportation and open spaces for recreation),
community and health services, and civic participation and
involvement. This will lead to higher social development outputs
because of more investments in the human capital rather than
investments in private capital.

R1 to 17. As local government becomes more focused on investing in the

R2 human capital of the people, public per capita spending will
increase to support and sustain public education, improving the
quality of the workforce, and public health care. These investments
will influence and shape the policies and programs of the local
economic management to continue spending for these investments
especially if the social returns are felt and yield positive outcomes.

R2 to 18. In the end, public investments in human capital and lower tax rates
B4 on the incomes of middle and lower classes will result to a slow yet
eventual increase in individual savings as health care, education
and human development costs are shouldered by the local
government. However, by lowering tax rates on low earners, local
government revenue will decrease, thereby affecting local
government per capita spending. Demand-side proponents suggest
that to offset the loss in revenue, the top earners should be taxed
higher.

B4 to 19. Moreover, with steady investments in human capital, aside from

R8 personal savings, individual spending on education, health care
and human development will decrease. With the decrease of
spending comes the accrual of more savings.

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 BRIIEF 20. Both supply- and demand-side economics promise to reach the end
CONCLUSION goal of higher incomes and more jobs to the people, albeit in
countervailing means and mechanisms.

Supply-side proponents believe that government in general should

not intervene in the free market to allow businesses to expand.
They argue that this will result to the creation of private sector jobs
that will grow the economy. They believe that tax rates should be
restricted to a minimum considering that people know how and
where to spend their money, and local government should not
attempt to provide everything to the people. In short, less local
government restriction will result to a freer market economy.

Meanwhile, demand-side proponents urge higher taxes on the top

1% and the upper class to finance public spending on development
programs and projects. This will lead to more investments in the
human capital of the people resulting to more positive social
returns. Moreover, they believe that lowering tax rates on the
middle and lower classes will ensure that people can spend on what
they need and save on what they earn resulting to higher
purchasing power that will support businesses and grow the
economy in the long run.

Impact of the Analysis

The analysis resulted to the enactment of the Revenue and Investment Incentive
Code of Bustos, Bulacan, which
blended the best features of the
supply-side and demand-side
economic approaches on 07 April
2014. The balance between the
two approaches contributed to the
increase in the number of
businesses in Bustos and
consumer spending due to the
subsequent availability of jobs.
The resulting improvement of
consumer purchasing power,
aside from a balance of fiscal
interventions, encouraged
investors to invest in Bustos.