4.Public Finance
Mojmír Sabolovic
mojmir.sabolovic@law.muni.cz
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Last seminar recap
Expenditure is the value of goods and
services bought by the State and its
articulations
Public expenditure make up charge
account of government budget
Can be financed throughtaxes, public
debt, money emission, international aid
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Main roles of Public Expenditures
contributes to current effective demand
it expresses a coordinated impulse on the
economy, which can be used for stabilization,
business cycle inversion, and growth purposes
it increases the public endowment of goods for
everybody
it gives rise to positive externalities to economy
and society, the more so through its capital
component
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Public Expenditures Composition
First, public expenditure can be
classified in terms of the kind of
goods and services bought, also with
very general items:
1. capital goods
2. consumption goods
3. personnel expenditure
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Second, public expenditure can be
classified according to the official
body an organization from which
budget it is paid, as for example:
1. the central state and its ministries
2. regional and local authorities
3. separate public bodies
4. international organizations
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Pension systems
Funded pension system is one
wchitch money is collected and
invested in a special fund from which
payments are made
Unfunded pension system is one in
which pension are paid from current
revenues
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Taxation
Forms income side of state budget
Tax is compulsory payment paid by
subjects of the economy, individuals or
enterprises, according to legally mandated
rules to state treasury. The tax system is
differ from country to country, generally
they all are similar (mainly for advanced
countries).
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History of taxation
Ancient Egypt around 3000 BC - 2800 BC in the
first dynasty of the Old Kingdom.
­ Pharaon collects the rvenues from the people
taxation is also described in the Bible
­ it states "But when the crop comes in, give a fifth of it
to Pharaoh. The other four-fifths you may keep as seed
for the fields and as food for yourselves and your
households and your children."
­ A share (20%) of the crop was the tax. While not money,
the idea is the same.
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­ Quite a few records of the government tax collection in
Europe since at least the 17th century are still available
today.
­ But the taxation levels are hard to compare to the size
and flow of the economy since production numbers are
not as readily available
­ The taxation as a percentage of production of final
goods may have reached 15% - 20% during the 17th
century in places like France, the Netherlands, and
Scandinavia.
­ This increase was greatest in England, Peter Mathias
and Patrick O'Brien found that the tax burden increased
by 85% over this period.
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Tax agencies
Tax collection is performed by a government
agency such as Revenue Canada, the Internal
Revenue Service (IRS) in the United States, or Her
Majesty's Revenue and Customs (HMRC) in the
UK. When taxes are not fully paid, civil penalties
(such as fines or forfeiture) or criminal penalties
(such as incarceration) may be imposed on the
non-paying entity or individual.
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Income part of state budget
The most controversial part
concerns income distribution
What is fair is philosophical question
Should the government use
­ Progresive tax
­ Regresive tax
­ Proportional tax
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Should there be exemptions?
­ Items of income that are not taxed at all
Should there be tax loophole?
­ Legal but unfair exemption
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Forms of taxation
Today, one of the most complicated taxationsystems
worldwide is in Germany. Three quarters
of the worlďs taxation-literature refers to the
German system.
There are 118 laws, 185 forms, and 96,000
regulations, spending  3.7 billion to collect the
income tax.
Today, governments of advanced economies of
EU, North America, and others rely more on
direct taxes, while those of developing
economies of India, Africa, and others rely more
on indirect taxes.
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Tax rates
Taxes are most often levied as a
percentage, called the tax rate.
An important distinction when talking
about tax rates is to distinguish between
the marginal rate and the effective
(average) rate.
The effective rate is the total tax paid
divided by the total amount the tax is paid
on, while the marginal rate is the rate paid
on the next dollar of income earned.
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Ad valorem tax
An ad valorem tax is one where the tax base is the value of
a good, service, or property. Sales taxes, tariffs, property
taxes, inheritance taxes, and value added taxes are
different types of ad valorem tax.
An ad valorem tax is typically imposed at the time of a
transaction (sales tax or value added tax (VAT)) but it may
be imposed on an annual basis (property tax) or in
connection with another significant event (inheritance tax
or tariffs).
An alternative to ad valorem taxation is an excise tax, where
the tax base is the quantity of something, regardless of its
price. For example, in the United Kingdom, a tax is
collected on the sale of alcoholic drinks that is calculated
by volume and beverage type, rather than the price of the
drink.
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Clasical supply-side economics
Focuses on incentive efects of taxes
It argues that low rates are central to an
economýs succes
Principles
Government cuts taxes, poeople will have grater incetive to
work, to save, to invest,
Output will increase, not boucouse of expectations of
increased demand, but boucese efect of lower tax rates on
supply
Théaggregate supply curve will shift out
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Failures
­ Deficit kept mounting up
­ Sypply incetives didn´t did not cerate
the neede increase in he growth of
potential output
­ Didn ´t end the political push for more
and more goverment spending
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Laffer curve
20Source: COLLANDER, D.C. Macroeconomics. Praha: LEDA, 2001.
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Income tax rate
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Tax system of the Czech Republic
The Czech Tax Administration manages these taxes:
Direct taxes
­ Legal Entity Income Tax
­ Natural Person Income Tax
­ Real Estate Tax
­ Inheritance tax, Gift tax and Real estate-transfer tax
­ Road Tax
Indirect taxes
­ Value Added Tax
­ Excise duty (Purchase Tax)
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Assignment requeremnts
­ Government deficit
­ Government debt
­ GDP
­ Inflation
­ Exports and Imports of goods and
services
­ Unemployment
­ Cost of living
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Unemployment
Unemployment is the condition of not having a job, often
referred to as being "out of work", or unemployed.
In economics, unemployment refers to the condition and
extent of joblessness within an economy, and is measured
in terms of the unemployment rate, which is the number of
unemployed workers divided by the total civilian labor
force.
The history of unemployment is the history of
industrialization. It was not considered an issue in rural
areas, despite the "disguised unemployment" of rural
laborers having little to do, especially in conditions of
overpopulation.
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Types of unemployment
Frictional
When moving from one job to another, the unemployment
temporarily experienced when looking for a new job.
Structural
Caused by a mismatch between the location of jobs and the
location of job-seekers. "Location" may be geographical, or
in terms of skills.
Cyclical (Demand deficient unemployment) unemployment
When there is not enough aggregate demand for the labor.
Caused by a business cycle recession.
Technological
Caused by the replacement of workers by machines or
other advanced technology (such as artificial intelligence
technology).
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Classical (real-wage)
When real wage for a job are set above the market-clearing
level, commonly government (as with the minimum wage)
or unions, although some (such as Murray Rothbard,
America's Great Depression p. 45) suggest that even social
taboos can prevent wages from falling to the market
clearing level.
Marxian
When unemployment is needed to motivate workers to
work hard and to keep wages down.
Seasonal
When an occupation is not in demand at certain seasons.
For example, construction workers in winter, ski teachers in
summer.
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The unemployment rate
The unemployment rate is:
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Cost of living
Cost of Living Index measures relative price levels for
consumer goods and services in participating areas. The
average for all participating places in each quarter equals
100, and each participanťs index is read as a percentage of
the average for all participating places.
The cost-of-living index is so constructed to estimate the
percentage by which money income would have to rise to
allow a household to buy the same bundle of goods as in
the base year. Thus, if money income is $10,000 in the base
year, to maintain purchasing power that money income
would have to rise to $11,000 for another year with an index
value of 110.
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Task for the next seminar?
Question about assigment...
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References
COLLANDER, D.C. Macroeconomics.
Praha: LEDA, 2001.
http://en.wikipedia.org/w/index.php?title
=International_trade&oldid=117267698
(lastvisited Mar. 26, 2007).
[1] Unemployment,
http://en.wikipedia.org/w/index.php?title=Unemployment&ol
did=117588170 (last visited Mar. 26, 2007).