1. Reported by :
Gutierrez, Irene
Alvarez, Celica May
Cortez, Cherry Ann
Sala, Sheila

3. Fiscal Policy
It takes off to influence income and consumption
and lead the economy towards growth and development.
It also has non-economic objectives which may
conflict with economic aims.
It is the use of government revenue collection
(taxation) and expenditure (spending) to influence the
economy.

4. Sources and Uses of Public Funds
a.Taxes
Include income taxes of individuals and businesses,
property taxes, residence taxes, import taxes,
inheritance taxes, gift taxes and other specific taxes.
Two Collecting agencies:
- Bureau of Internal Revenue
- Bureau of Customs
b. Non-tax revenues
Include collection of fines and fees, licenses and
registration charges and profits earned by government-
operated and controlled corporations.

5. Public Debt consists of all claims against our government
which may have resulted from loans or advances extended to
the Philippine government or as payment of goods or services
rendered to it.
A government tends to borrow for three reasons:
1.Due to political reluctance to raise tax
2.Some government-sponsored capital improvements should
be paid
3.A deliberate use of the budget to stimulate the economy.
Government borrowing may be undertaken from internal
sources such as Central Bank, or from external sources such
as foreign governments.

6. Taxation: A Tool
Taxation as a tool is not just a source of income of the
government. It is also used as an instrument to manipulate
conditions in the economy.
An increase in tax rates will lessen the disposable income
of the people and cause their demand to decrease.

7. Principles of Taxation
Direct Taxes are collected from people and are paid directly to a
tax collecting agency of the government.
Examples: Income taxes, inheritance and residence taxes
Indirect Taxes are collected against goods and services and only
indirectly on people.
Examples: Sales taxes and import duties

8. Taxation is the system of payments that individuals and
businesses are required to pay the government.
Progressive tax system
The tax rate tends to increase with an increase in the tax
base
Regressive tax system
It is one where tax rates are high for low bases and
decrease with high bases.
Proportional tax system
It imposes a uniform tax rate on all income levels.

9. Burden of Taxation
Taxes are considered a burden.
Two types of tax burden:
A. Impact
It is the burden of the person who pays the tax for
the first time
B. Incidence
It is the burden of the person who ultimately has to
pay for the tax.
For indirect taxes, the impact and the incidence of the tax fall on
different people.

13. Income Distribution and the Lorenz Curve
Income distribution refers to the pattern of incomes received by
different sectors in the economy.
The size of income distribution shows how income is shared.

15. The Uses of Fiscal Policy
Fiscal Policy may be used by the government to stimulate and
depress the economy.
Fiscal policy can either be expansionary or contractionary.
It is expansionary or loose when taxation is reduced or public
spending is increased with the aim of stimulating total spending in
the economy, known as aggregate demand.
On the other hand, fiscal policy is contractionary or tight when
taxation is increased or public spending is reduced in order to
restrict demand and slow down the economy.

16. Increasing government purchases or cutting tax rates will have the
effect of increasing aggregate demand. Reducing government
purchases or increasing tax rates will decrease aggregate demand.
A deficit budget has an expansionary effect since it increases the
flow of money into the economy as a result of an increase in
government spending, the excess spending being derived from the
sources other than taxes.
A surplus budget has an contracting effect since not all the taxes
collected from the people are channelled back into the economic
stream.

17. Effects of the Budget
The deficit and balanced budget have an expansionary effect while
surplus budget can depress the economy.
Consider a budget where tax collections amount to P450 billion
and the government spends P480 billion. This is obviously a
deficit budget since government expenditure exceed tax revenue
by P30 billion.
Supposing, the MPC is 80%, then the income multiplier will be:
K = 1 / 1 - .8 = 1 / 2 = 5
P30 billion x 5 = P150 billion, which means additional income
generated and can therefore lead to expansion in the economy.

18. Now, consider a budget where tax collections amount to P450
billion and the government spends P430 billion out of these
collections. The government keeps a surplus of P20 billion.
Using the same MPC of 80% so income multiplier is 5, the P20
billion surplus will lead to decrease in income multiplied by 5.
Thus, P20 billion x 5 = P100 billion decrease in income.
It has been said that the balanced budget is also expansionary, but
to a lesser extent than the deficit budget. This is because the
balanced budget increases income only by an income multiplier
equal to 1.

19. Supposing the P450 billion tax collections of the government are all spent.
Since government expenditure is equal to tax revenue, then the balanced
budget will increase income by 1. Thus, P450 billion x 1 = P450 billion increase
in income.
Comparing, what the government actually earns from its spending with what is
given up the tax payers, we derive the following:
Government Exp. Of P450 billion x
Income multiplier of 5 P2,250 billion
Income given up on tax payments:
Consumption spending: 80% of P450 billion
= 360 billion x multiplier of 5 1,800 billion
Savings: 20% of P450 billion = P90 billion:
no income generated ──
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NET INCREASE IN INCOME P450 billion