Module 6: Designing the Tax System

• Revenues

  • Revenues of the government come from tax and non-tax revenues
• 1. Tax Code

  • Describe what is to be taxed in what amount
• Direct Taxes

  • is levied on the income or profits of the person who pays it, rather than on goods or services
  • In the Philippines, the most important ___ taxes are the personal income tax and the corporate tax
• 1. Taxes on individuals

  • Marginal tax rate is the amount by which taxes increase from an additional peso of income
• 1. Indirect Taxes

  • is a tax levied on goods and services 
  • In the Philippines, the most important ___ taxes are value-added tax (VAT) and excise tax
• 1. Value-added tax

  • is a tax levied on a product whenever value is added at each stage of the supply chain
• 1. Excise tax

  • is a tax on the production, sale or consumption of a commodity
  • 2 types:
  • Specific Tax – based on weight or volume capacity or any other physical unit of measurement
  • Ad Valorem Tax – based on selling price or other specific value of the goods/articles
• There are 2 objectives of choosing what to tax: efficiency and equity:

  1. Efficient tax system – one that imposes small deadweight losses and small administrative burdens
  2. Equitable tax system – one that shares the burden of the tax equitably
• Efficiency Principle #1

  • If it creates negative externalities, tax it

  Efficiency Principle #2

  • Tax the commodity that is more price inelastic

  Efficiency Principle #3

  • VAT is increasingly used to replace income taxes, especially in developing countries because it encourages truthful telling (as opposed to tax evasion on income)

  
  

  Efficiency Principle #4

  • Increase the share of taxes with the smaller distortions to incentives
  • In some countries, VAT is preferred to income taxes because it does not discourage saving or working