Public Finance & Tax

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 Public Finance

What is public finance?

Public finance means how the

government raises funds and spends the
money on various kinds of services for
the economy.

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So public finance is concerned
with

The revenue and expenditure of the

government

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The government is referred to as

the public sector

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The size of the public sector is
measured by the

amount of public expenditure ( 100% )

GDP

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Public expenditure as % of GDP of the
HKSAR

1997-98 1998-99 1999-2000 2000-01 2001-02

17.7% 21.2% 22.0% 21.1% 21.6%

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 Sources of government revenue
• tax
• non-tax

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Classification
of taxes

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 Classification of taxes

According to the party who bears the tax

burden, taxes can be classified into:
________
direct taxes and ________
indirect taxes

According to how the tax payment changes

with income, taxes can be classified into:
__________,
progressive ____________
proportional and
__________
regressive taxes

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 Tax revenue ( 1 )
• Direct tax • Indirect tax

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 Direct tax

• is a tax on income or • Examples in Hong

wealth. Kong
• the tax incidence or • salaries tax
burden CANNOT be • profit tax
shifted. • property tax
• the tax rate is either • estate duty
progressive or
proportional • interest tax ?
• dividend tax?
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 Indirect tax
• is a tax on goods and • Examples in H.K.
services
• cigarettes tax; stamp
• the tax incidence or duty; general rates;
burden CAN be vehicle import tax;
shifted ( usually to the airport departure tax;
consumers, depending tax on alcoholic liquor;
on the elasticity of hotel accommodation
demand and supply ) tax; entertainment tax;
• the tax rate is betting tax and etc.
regressive
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 Quiz 1
Types Direct tax Indirect tax
Profits tax 
Estate duty 
Stamp duties 
Betting duties 
Property tax 
Salaries tax 
Classify the above Indonesia taxes into
direct and indirect taxes.
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 Tax Revenue ( 2 )
• Progressive tax;

• Proportional tax; and

• Regressive tax

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Progressive, proportional and regressive taxes

rogressive tax:
Tax payment takes ____________________
an increasing percentage of
taxable income as income increases.

roportional tax:
Tax payment takes ____________________
the same percentage of
taxable income as income increases.
egressive tax:
Tax payment takes ____________________
a decreasing percentage of
taxable income as income increases.
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Progressive, proportional and regressive taxes
A, B and C are three types of tax:
Taxable income $150,000 $200,000
Tax payment $15,000 $15,000
A
Average tax rate 10% 7.5%
Tax payment $10,000 $15,000
B
Average tax rate 6.7% 7.5%
Tax payment $12,000 $16,000
C
Average tax rate 8% 8%

Fill in the blanks of average tax rate !

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Progressive, proportional and regressive taxes
A, B and C are three types of tax:
Taxable income $150,000 $200,000
Tax payment $15,000 $15,000
A
Average tax rate 10% 7.5%
Tax payment $10,000 $15,000
B
Average tax rate 6.7% 7.5%
Tax payment $12,000 $16,000
C
Average tax rate 8% 8%
Which type of tax is a progressive tax?
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Progressive, proportional and regressive taxes
A, B and C are three types of tax:
Taxable income $150,000 $200,000
Tax payment $15,000 $15,000
A
Average tax rate 10% 7.5%
Tax payment $10,000 $15,000
B
Average tax rate 6.7% 7.5%
Tax payment $12,000 $16,000
C
Average tax rate 8% 8%
Which type of tax is a regressive tax?
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Progressive, proportional and regressive taxes
A, B and C are three types of tax:
Taxable income $150,000 $200,000
Tax payment $15,000 $15,000
A
Average tax rate 10% 7.5%
Tax payment $10,000 $15,000
B
Average tax rate 6.7% 7.5%
Tax payment $12,000 $16,000
C
Average tax rate 8% 8%
Which type of tax is a proportional tax?
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 Quiz 2

Suppose the government levies a tax of

$10 on all passengers who depart HK by
sea. What type of tax ( progressive /
proportional / regressive ) is it?

regressive tax. Since all

It is a _________
passengers pay the same amount
of tax, tax payment takes a
smaller proportion of income
_______
for the higher income group.
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 Quiz 3

When the tax payment increases as the

income increases, is it a progressive tax ?

No
____.
A tax is progressive if the tax
payments takes an increasing
percentage of taxable income as
income increases.
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 Quiz 3

When the tax payment increases as the

income increases, is it a progressive tax ?

e.g. Taxable Tax Average

income payment tax rate
100,000 10,000 10%
150,000 12,000 8%

Fill in the average tax rates !

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 Quiz 3

When the tax payment increases as the

income increases, is it a progressive tax ?

e.g. Taxable Tax Average

income payment tax rate
100,000 10,000 10%
150,000 12,000 8%
The tax payment increases as
the income increases, but it is a
regressive
_________ tax.
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 Non-tax revenue
• Examples:
sale of land; fines and penalty; government
fees and etc.

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